While many people immediately think of credit cards when it comes to borrowing money on an as-needed basis, a home equity line of credit (HELOC) is another, often-overlooked tool you can use to draw funds for countless purposes — at a lower interest rate than most credit cards.
Before we share three of the smartest ways you can use a HELOC, let’s take a quick look at what a HELOC actually is.
A HELOC, like any home equity loan, uses the equity you have in your home as collateral for borrowing funds. Put simply, to calculate how much you can borrow, a lender compares the market value of your home with the remaining balance on your mortgage to set an upper limit for your home equity loan. For more details about how home equity loan amounts are calculated, check out our FAQ.
Lake Michigan Credit Union (LMCU) offers two types of home equity loans: a fixed home equity loan that provides you with an exact amount of funds and a set repayment term with consistent principal and interest payments. A HELOC, on the other hand, is much more flexible, as you only draw funds from it as needed — with interest-only payments during the initial draw period of up to 10 years.
A fixed home equity loan can be a good choice when you’re making a single big purchase for a defined price. But because life and dreams alike are rarely so predictable, a HELOC can be a better choice when the precise amount of funding you’ll need isn’t immediately clear. That’s why HELOCs are commonly used for funding renovations, consolidating debt, and paying off unexpected expenses.
There’s a good reason that home renovations are the most common use for a home equity line of credit: renovations are unpredictable! No matter how detailed your plans are for a new bathroom or refreshed kitchen, once you get down to the nitty-gritty, unexpected expenses are almost inevitable — and they add up fast.
That’s where a HELOC comes in: with its flexible draw period, you can take out your initial, anticipated renovation funds while still having a reliable reserve to pull from if the renovation ends up more expensive than you thought.
Better yet, in addition to a HELOC’s low interest rate saving you money when compared to most credit cards, renovations add value to your home should you ever decide to sell, further decreasing the long-term cost. Some of the best renovations for adding value to your home include updating your kitchen with granite countertops and new appliances, redoing your bathroom with a walk-in shower and modern faucet fixtures, and installing smart technology like an energy-efficient touchscreen thermostat or an advanced doorbell camera.
The perks of a HELOC’s low interest rate go beyond renovations. If you’re finding yourself a little stressed out about credit card bills or medical debt, a HELOC can be a great way to simplify your monthly payments while giving you some peace of mind, too. And since a HELOC is a revolving line of credit, you can pay off your credit card debt, medical debt, or other personal loans using that HELOC, then tackle the balance at your new, lower interest rate — and at a more comfortable rate of time, too, with interest-only payments for up to 10 years.
On top of all that, you’ll only be making one monthly payment on your HELOC, so it will be easier to keep track of your finances without worrying about missing a payment.
Planned renovations and plans to tackle debt are one thing, but sometimes a big expense truly blindsides you. And while it’s best to have money set aside in an emergency fund for such scenarios, life often has other plans for your budget. While we hope you never find yourself in this situation, it can help to know you have access to additional funds through a HELOC if you need them.
Even though an approved HELOC will come with a maximum amount of funds you can withdraw, you aren’t obligated to withdraw it all. With this on top of the low interest rate and long repayment term, a HELOC can be a reliable safeguard to keep in your back pocket for those worst-case emergencies. But as with all HELOC use cases, always remember that using your home as collateral comes with a substantial risk, so only open a HELOC if you’re certain you can pay it off eventually.
Between its affordability and flexibility, a home equity line of credit can be a real Swiss army knife for homeowners looking to access additional funding. After all, you’ve invested a lot into your home, so it’s empowering to know that you can put the equity you’ve built to work for you, too. To learn more about opening a HELOC with LMCU, visit our Home Equity HQ.