A HELOC can help you use the equity from your home to finance major purchases. There are other ways to turn equity into cash — like cash-out refinancing and home equity installment loans — but HELOCs are often considered the most flexible and cheapest method to unlock equity.
Advantages of a HELOC
One of the best things about tapping home equity is that it allows you to get cash fast without selling the house you’re living in. Because the borrowing is secured, you’ll likely be offered an affordable interest rate. Depending on factors like your credit score, location, and the value of your property, the interest on your HELOC could cost less than half of other unsecured financing alternatives. So unless you can qualify for the lowest credit card or personal loan rates, paying for something big with a HELOC makes financial sense.
Both home equity lines of credit and home equity loans are types of second mortgages.
Here are five great ways you can put a HELOC to good use.
Renovations
Homeowners often turn to traditional bank HELOCs for renovations because they don’t know exactly how much they’ll need at the start of their project. Rather than taking out an installment loan and incurring interest right from the beginning, you can arrange a HELOC so you have a ready supply of fast cash up to your approved limit, then draw on the credit line as needed.
While many owners renovate so they can enjoy their home more, others make changes to improve its value. You could boost the wow factor of your home by installing a new roof, modernizing the garage, or remodeling the bath or kitchen, then recoup renovation costs when you’re ready to sell up.
There are tax advantages to tapping home equity for renovations too. Interest charged on the HELOC can be tax-deductible if the loan is used to substantially improve your property. You can deduct interest on up to $750,000 of qualifying loans. Consult a tax advisor about your situation before making any decisions.
New Vehicle
Although some people suggest you should always use borrowed money for assets that appreciate in value, a motor vehicle offers value-in-use that could actually increase wealth. This is particularly the case if you need to drive to and from work, or if having access to a vehicle is integral to doing your job. If your family is getting bigger, then upgrading your vehicle may be necessary to keep everyone moving.
Since the interest rate on a HELOC is typically cheaper than what you’ll get with auto loans, financing your vehicle purchase with a HELOC is likely to result in lower interest payments.
Pay off debt
If you’re struggling to keep up with repaying multiple debts, say from credit cards, student loans, and personal loans, then consolidating them into a single debt is a great way to make life easier.
Where you have high-interest debt outstanding, tapping home equity to pay them off could result in significant savings. Interest rates on debt consolidation loans are often twice as high, so a HELOC could help you eliminate debt much faster.
Furniture / Electronics
Furniture and electronics can be expensive, but often necessary. If you need to invest in the right furniture and electronics for your home office, then financing them with a HELOC is a far better alternative than racking up a large credit card debt.
Unless you apply for a credit card with a low introductory rate and you pay off the balance within the promotional period, you’ll likely end up paying a lot of interest. The average credit card rate often exceeds the average HELOC rate.
Equipment
Many homeowners start or expand their business using their home equity. It allows them to invest in the right tools and equipment without having to apply for a business loan. Qualifying for business financing with a traditional lender can be difficult — you’ll typically need good personal credit, a business track record, and detailed plans to support your loan application.
Since lenders aren’t usually concerned about how you use your home equity line of credit, you can get the equipment you need and take advantage of business opportunities much faster.
How much equity can I draw?
The amount of equity you have determines how much you can borrow. Home equity is the difference between the current market value of your house and your outstanding mortgage.
If your property is worth $300,000 and your mortgage balance is $80,000, then your equity is $220,000.
The loan-to-value ratio, which is a different way to measure how much you owe on your mortgage, is $80,000 ÷ $300,000 = 26.67%
When you apply for a HELOC, lenders look at the combined loan-to-value (CLTV) ratio and typically want this to be 80% or less.
Continuing with our example, you’ll reach a CLTV of 80% if you have $240,000 of combined loans outstanding. Since you already have a mortgage balance of $80,000, you can take out a maximum of $160,000 home equity line of credit before reaching the $240,000 limit.
HELOC vs cash-out refi
The main difference between a cash-out refi and a HELOC is that the former doesn’t necessarily involve a second loan. Instead, you refinance your mortgage for a larger sum than what you owe so you can take the difference in cash. Here are some factors to consider when deciding between these two options:
Closing costs for a cash-out refi can be high while there are no closing costs for a HELOC.
If you refinance when mortgage rates increase, you could end up paying a lot more interest compared to your current home loan.
Ultimately, the best financing strategy often comes down to what you’re using the money for and whether you need the entire balance immediately. Check out Figure's HELOC vs Refi calculator to see which option is right for you.
How a HELOC from Figure works
With an advanced digital lending platform, you can expect faster and cheaper loans with Figure. Our HELOC application process is 100% online — so you can get approved in five minutes with no in-person appraisal needed with funding in as few as five days1navigates to numbered disclaimer.
Figure HELOCs offer fixed rates2navigates to numbered disclaimer so if interest rates change, the new rate will only apply to new draws.
Figure charges a one-time origination fee only3navigates to numbered disclaimer, so there are no account opening fees, maintenance fees, closing costs, or prepayment penalties.
You can get your personalized rate in just a few minutes, without affecting your credit4navigates to numbered disclaimer.
