Best And Worst Ways To Use A Home Equity Line Of Credit

Posted on: 29 May 2017

A home equity line of credit (HELOC) is a type of loan you can get on your house if you have equity in the home. If you currently have equity and are considering taking out a HELOC, it's important to understand the best and worst ways to use the money you get from it. It's also important to realize how a HELOC works.

How a HELOC works

A HELOC is very similar to a credit card in a sense, yet it is also similar to an installment loan. When your lender approves you for a HELOC, the lender will state the maximum amount of money you can borrow. This may be $10,000 or more, but it will depend on how much equity you have. You can then borrow some or all of the money from it, and you will have to repay it in monthly payments. Your monthly payments will be determined by a fixed interest rate and a specific amount of time. If you only borrow part of the money, you are free to borrow more later. If you do this, your payments will be recalculated, so you will only have one payment to make for this each month.

The best ways to use proceeds from a HELOC

Borrowing the equity in your home is a great way to tap into cash, but you should use caution when borrowing this money, because you will have to pay it back. Some of the best ways to use the proceeds from a HELOC is for home remodeling projects or to consolidate debt. When you remodel your home, your home value is likely to increase, which makes owing more money on your home a sensible option. If you have high-interest debts, it also makes sense, simply because your interest rate will probably be a lot lower on your HELOC.

The worst ways to use proceeds from a HELOC

There are also some bad ways to use the money you take from a HELOC. One of these is to go on a dream vacation. A dream vacation may be fun and turn out to be a great experience, but you will be stuck paying this off for the next five years or so if you borrow money to make it happen. If you want a dream vacation, you would be better off saving up for it.

One other bad way to use the money is for investing purposes. If you see a great opportunity in the stock market and want to quickly invest money in it, using money from a HELOC is not the best option. This investment might turn out to be a great way to make money, but it could also be a flop. If it is a flop, you will be repaying money on your HELOC for nothing.

If you are interested in borrowing money from the equity in your loan, talk to a lender to find out if a HELOC is right for you.