If you’re cash-poor and house rich – or if you at least have equity built up in your home -- a home equity line of credit, or HELOC, can unlock that equity and make that money available to pay bills, improve your home or set up an emergency fund. Unlike a second mortgage, you don’t have to take out all the money from a HELOC at once. You can open a HELOC even if you don’t need the money right now. Homeowners choose to open a HELOC for a variety of reasons as part of their overall financial strategy. Having this money available can help in a pinch.
Because the money in a HELOC is available to you whenever you need it, many people open a HELOC to be ready for emergencies. Whether you need to replace the roof, repair your car or pay medical bills, you can access the money by simply writing a check, or in some cases, charging the bills to a credit card connected to your HELOC. If you don’t have money in savings to cover emergencies, a HELOC is one alternative.
Whether you want to remodel your kitchen, add a deck or simply make much needed repairs, a HELOC is one way to pay for the work. You can write checks from the HELOC account for materials and labor and deduct the interest on your taxes, if you itemize deductions. Because repairs or improvements can enhance the value of your home and preserve or increase your equity, using the home itself to finance the work might make sense.
If you carry balances on several credit cards, an auto loan and other smaller loans, you might want to draw money from a HELOC to pay off all these debts. You’ll be left with a single payment which can be at a lower interest rate. HELOC interest rates usually vary with the prime rate, so it may fluctuate. And unlike the interest you pay on auto loans and credit cards, you can deduct the HELOC interest on your income tax return.
A home is often the largest asset a family has. If you haven’t been able to save money for education, accessing the equity in your home with a HELOC is one way to pay tuition, whether you want to pay for a child’s education or complete your own. If you’re training for a new career or seeking to advance in your current job, paying for college, grad school or technical training with a HELOC could be a better financial decision than taking out student loans, because the HELOC interest is tax deductible. Depending on the terms of your HELOC, you may only owe interest until you sell your home or the HELOC expires.
Cynthia Myers is the author of numerous novels and her nonfiction work has appeared in publications ranging from "Historic Traveler" to "Texas Highways" to "Medical Practice Management." She has a degree in economics from Sam Houston State University.