A HELOC can be used the same way as your credit cards. But, it’s not advisable to withdraw cash for everyday purchases or indulgences. You don’t want to be making payments on a designer handbag or flat screen TV twenty years from now. Instead, use your HELOC for purchases that count.
Here are five financially sound ways to use your HELOC:
1. Consolidate high-interest credit card debt. Credit cards almost always have higher interest rates than home equity loans. By paying off your credit cards with your HELOC, you may be able to lower your monthly payment and decrease the total amount you pay over time.
2. Improve your home. Your home is an investment. By making repairs and improvements with HELOC money, you can increase its value. Obviously, the amount you spend should be determined by your area and the current real estate market. Almost all properties can increase in value through basic repair. Extravagant improvements (such as a designer spa bathroom in a modest 2 bedroom home) may not be worth the money they require. (See also: Intel Remodeling Site).
3. Pay college tuition. A HELOC is sometimes a good choice if you need a little longer to pay off college tuition bills. Keep in mind that many lenders offer student loans at even lower interest rates (particularly if the student qualifies for a government subsidized loan). In cases where you cannot get a low-interest student loan, a HELOC may work as a short term solution.
4. Pay medical bills. If you cannot pay your medical bills in a lump sum, a HELOC can help. Paying medical bills with a HELOC will save you money over using a credit card. It can also help you avoid the late fees and collections calls that accompany delinquent doctor’s office bills.
5. Prepare for an emergency. Many lenders offer no-fee HELOCs, an attractive choice for borrowers wanting to have cash on hand. By taking out a HELOC now, you’ll be able to instantly withdraw money should you have an unexpected medical bill or necessary home repair. When faced with unexpected expenses, a HELOC is almost always a better choice than a credit card or personal loan. You should be aware, however, that taking out aHELOC will affect your loan-to-value ratio. If it pushes you over the acceptable level, you may have trouble getting a good interest rate on additional loans / credit cards.
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