Even for High-Net-Worth individuals, a home can be a family’s most valuable assets, and that asset can serve as a significant source of liquidity, and wealth creation, if used appropriately.
When it comes to a home equity line of credit (HELOC), drawing on one to renovate, upgrade or remodel a home is an extremely common use-case. Leveraging the equity in your home to invest in a business venture or pursuing further education, are less traditional, but potentially even higher return, uses.
Many home equity lines of credit are used to fund home improvement projects - and for good reason. A HELOC allows you to borrow against an asset to improve that very same asset at generally lower rates than a personal loan. In essence, you use the equity you’ve acquired to further grow the value of your home. But it’s not the only way you can use a HELOC to grow personal wealth. Many don’t realize that a HELOC provides access to cash for major expenses without having to sell securities or pull out of investments, which can appreciate in value exponentially over time.
“When people think HELOC, they automatically jump to the new kitchen project or backyard patio and pool,” said Jon Kessler, head of Credit and Cash Management for PNC Private Bank. “While those are certainly legitimate uses, a HELOC can be a versatile and sophisticated product that can help grow one’s wealth in many different ways.”
Here are some ways you can use a HELOC to do more than home improvement:
1. Improving or Financing a Business
Whether it’s a large capital expense at your existing business or startup costs for a new venture, a HELOC offers versatility and few limitations on eligible expenses. One of the primary benefits of using a HELOC to fund business expenses is control of ownership. A HELOC allows you to avoid selling equity to fund investments in your business at interest rates that may be lower than a standard business loan.
2. Advance Your Education
You can use your HELOC to pay for tuition for yourself or a child. A HELOC may provide a better rate than some student loans. Depending on the equity in your home, your line of credit could be large enough to cover your entire financial need. It’s important to note that choosing a HELOC to fund an education could forfeit certain tax deductions for education expenses, but that may be made up for in interest rate savings.
3. Purchasing Real Estate
Your HELOC can fund all or part of an investment property or a vacation home. You may be able to leverage your HELOC for a higher down payment, lower mortgage rate, or even fully fund a new real estate purchase. Over time, if you choose to rent that property, your proceeds could more than pay for the price of the HELOC.
4. Luxury Purchases
There are very few limitations to what you can use your HELOC to fund. That can include big-ticket luxury items like vacations, luxury cars, boats, jewelry, or art. The benefit to using a HELOC for luxury purchases comes primarily through the advantage of better interest rates on a HELOC than on other types of loans.
The Difference Between Can and Should
A HELOC is a valuable financial tool that takes advantage of what you’ve already worked hard to create – the equity in your home. It can be a good source of liquidity at a lower interest rate than a traditional loan and can be structured for interest-only payments during the draw period of the loan. It’s also provides access cash without disruption carefully planned investment strategies or creating tax consequences from liquidating appreciated investments. Additionally, there are few restrictions for what you can use your HELOC to fund.
As with many choices, just because you can, doesn’t mean you should! The same holds true for how you use your HELOC. All home loans come with the risk of losing your home if you don’t repay what you’ve borrowed, so careful consideration needs to be taken before using your line of credit to purchase something that can depreciate or is illiquid. Your financial advisor can assist in determining if a HELOC is the best option to achieve a specific financial goals.
“If drawing down against all the equity in your home to buy that new boat stretches your financial situation, then using a HELOC is probably not a safest option,” said Kessler.
