What can you use a HELOC for?

Home improvements

While the funds from a HELOC can be used for a variety of financial objectives, most homeowners turn to a HELOC when they’d like to make a major home repair or renovation but don’t have the available funds. According to the Journal of Light Construction, a basic roof repair starts around $30,000, while a major kitchen renovation costs an average of $78,000.

Interest on a HELOC is only tax deductible if you use the money to improve your home. If you use a HELOC for any other purpose, you can’t deduct the interest you pay when tax time comes. Of course, now that the standard deduction is much higher than it used to be, this may not be as much of a drawback as it would have been in prior years.

Some hesitance makes sense when applying for a HELOC. But remember, some home improvement projects have good returns on investment, which means you’ll put money into your home, but the value will increase as well.

According to Boyer, here are some of the most impactful home improvements you can make:

• Kitchen renovations
• Bathroom remodels
• New windows (for energy efficiency)
• HVAC system updates
• Adding an in-law suite

Debt consolidation

If you’re carrying lots of debt with high interest rates, a HELOC might be a great way for you to consolidate your debt and pay less in interest each month. “You may also be able to lock in a fixed rate for this type of debt if you feel interest rates will go higher,” Boyer told us.

But it’s important to understand that your HELOC payments will be interest-only payments. That means you’ll have to make a plan to pay off the principal as well, Boyer said. “Also, keep in mind that these lines are typically good for a period of 10 years and must be paid off immediately if you sell your home.”

Here are the main pros and cons of using a home equity line of credit to consolidate your debt:

» MORE: What is debt consolidation and should I consolidate?

Education expenses

Education expenses can add up quickly, from private school tuition to college or certification programs. If you’re short on cash, you might wonder whether you can use your home’s equity to help pay for education costs, whether for yourself, your child or your spouse.

The answer is yes, you can. However, the interest isn’t tax deductible unless the HELOC is used to improve your home.

“When deciding to use a HELOC for education, it’s important to understand that the interest rate is floating and the minimum payment only covers the interest due,” Boyer told us. Because of this, it’s important to plan ahead. Think about how much you’ll borrow, how rates could change and what you can pay back each month.

From a long-term financial planning standpoint, the decision to use a HELOC to pay for student loans comes down to a matter of priority, especially when using it for a child. If you’re a parent considering a HELOC for college costs, remember that you may be nearing retirement while your child still has decades to repay student loans. Before borrowing against your home, weigh your financial priorities and consider speaking with a financial advisor.

Obtaining a HELOC to pay for student loans might seem like an attractive option since you can likely tap a large amount of money quickly and easily, drawing on it when you need it instead of getting one lump sum. But the ramifications if you were to default on the loan can be dire.

Emergency expenses

When emergency expenses arise, quick access to large amounts of money can be attractive. While the best plan is to keep a cash emergency fund for life’s unexpected surprises, a HELOC can serve as a bridge, Boyer said. But while a HELOC can be a great short-term safety net, using one for this purpose should be considered carefully.

If you’re already in a tight spot financially, will you be able to repay? If not, you could be putting your home at risk by using it as collateral. Before drawing on your home’s equity to pour money into an emergency fund, consider whether you have things you could sell to bring in some money or think about if a short-term side gig might be an option for you.

How to get a HELOC

Your regular bank is the best place to start if you want to get a home equity line of credit. You’ll go through the application process, where you’ll specify the amount you’re requesting. After that, there'll be an appraisal to assess the market value of your home.

The credit line you qualify for is typically based on the difference between your home’s appraised value and what you still owe on your mortgage, said Boyer. Typically, you can apply for a HELOC up to 80% of your home’s value. Most HELOCs have a period of 10 years, and the interest is tax deductible. Some HELOCs allow you to pay only interest for a period of time.

In order to get the best interest rate, your credit score should be in good shape before applying for a HELOC. But keep in mind that the interest rate will change over the life of the loan. “These are typically ‘floating’ rates,” Boyer said, “which means they move up and down with interest rates.”

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