If you’ve ever wondered if you can use home equity loans for anything, you’ll be happy to know that the answer is yes. A home loan such as a home equity line of credit (HELOC) or home equity loan allows you to turn your home equity into cash, which then gives you the ability to use the funds however you see fit. This can include paying off other bills, buying a car, financing home upgrades, paying for vacation expenses, and more.
With that being said, using a home equity loan or home equity line of credit does carry risks. You’ll also have to pay closing costs and interest fees. Because of this, you may want to consider using funds in a manner that makes the most financial sense.
We’ll go through some common uses of a home equity loan as well as some pros and cons to consider. But one last VERY important piece of advise before jumping in: just because you can use your home equity for anything, does NOT mean you should. Be very careful before turning your home into cash because if you fall behind on payments, the bank or lender has foreclosure rights over your home!
Differences between a home equity loan and HELOC
A home equity loan and a HELOC both allow you to use the funds for pretty much any purpose. The main difference is that a home equity loan is a closed-end loan. You’ll be given a lump sum of funds, typically at a fixed interest rate.
A HELOC, on the other hand, gives you the flexibility of a revolving credit line. You’re given a draw period during which you can continue to draw funds on an as-needed basis up to the credit limit you have been assigned. Most HELOCs, however, carry a variable interest rate, so your monthly payments could fluctuate over time.
Common Uses and Benefits of a home equity loan or HELOC
Many folks will recommend using a HELOC on something that will offer some sort of return on investment, such as the down payment on investment property, paying for college tuition, or conducting home improvements. In other words, it should be something that helps you achieve your financial, personal, or professional goals.
Here are some common uses of a HELOC and how they can benefit you:
Debt consolidation
Using a HELOC to pay off debt can help you simplify your finances and save you money in the long run. By consolidating debt, you can combine multiple payments into a single monthly payment on your HELOC. With fewer payments to manage, you’ll also be far less likely to accidentally miss a payment that could otherwise lower your credit score or result in late fees being charged.
Using a HELOC can also save you money if interest rates on your other bills are higher. This can include credit card debt, auto loans, medical bills, personal loans, or your student loan balance.
Perform repairs or upgrades to your home
Using funds from a HELOC to pay for home improvements can be beneficial because it can increase your home’s value. Doing so can also increase the amount of equity in your home.
One thing to keep in mind is that some lenders may not approve you for a loan if the property is currently in need of major repairs that are deemed health or safety hazards. If you find yourself in this situation, you can try another lender, or get a personal loan to fund the repairs first. Once the repairs are complete, you can then get a HELOC to pay off the personal loan.
Invest in a Business
If you are a startup with little to no prior track record, it can be difficult to get a business loan. However, since a HELOC considers your personal credit and income, it can be easier to get as a source of funding to cover your business expenses.
With that being said, keep in mind that using funds to invest in a business can be risky. The failure rate of startup companies is high, and since a HELOC uses your home as collateral, you could lose the property in foreclosure if you’re unable to make timely payments.
Fund educational expenses
Educational expenses can include things like college education, business license, or other professional certifications. Using a HELOC to pay for these items can be a smart move that can yield long-term gains for you professionally and financially. You can also use this as a method for obtaining work in a different industry, whether it be a side gig or a full-time career change.
Less common uses of a HELOC
You can use a home equity line of credit for pretty much anything. However, just because you can does not mean you should. Below, we’ll go over some other items that a HELOC can be used for, but you may want to think twice about them before doing any of these yourself.
Buying a new car
New cars depreciate in value as soon as you drive them, so using a HELOC to purchase a new vehicle may not be the wisest financial choice. In addition to the vehicle’s depreciation, you’ll also be paying interest on the HELOC.
If you are in need of transportation, you can consider a used vehicle. Used cars are not only cheaper, but they also will not depreciate as quickly as a new car.
Paying for vacation expenses
You can use a HELOC to pay for a vacation, but remember that it’s a loan that must be repaid. You should consider your finances and how this will impact your budget. For instance, do you have a strong monthly cash flow but just haven’t saved up enough to pay for a vacation upfront? Or will you struggle to make the monthly payments once you return from vacation?
Since a HELOC uses your home as collateral, you could lose your property to foreclosure if you miss enough payments. Therefore, it’s important that using your HELOC for a vacation will not put any strain on your ability to repay the loan.
Regularly covering a monthly cash flow deficit
You can use a HELOC to cover temporary cash flow shortages in your monthly budget. But if you find yourself doing this on a regular basis, you may want to review your monthly budget to figure out why it keeps occurring.
This is because having regular cash flow shortages can lead to a HELOC balance that continues to grow month after month. With a larger balance, your minimum required payments will also continue to increase, which could eventually impact your ability to make timely payments.
Risks of using a HELOC
Using a HELOC doesn’t come without risks. For example, you could lose your home to foreclosure if you miss enough payments. With so much at risk, you’ll want to be sure you can afford the monthly payments. It’s a good idea to think about the stability of your income, as well as the size of your emergency fund.
Another thing to keep in mind is that since HELOCs typically come with a variable interest rate, your monthly payments could also change over time. You should consider how your ability to make the minimum monthly payment might be impacted if this happens.
How much does it cost to get a HELOC?
The cost of getting a HELOC typically runs between 1% and 4% of the loan amount. However, in addition to those one-time fees, you may also have ongoing recurring fees as well.
What closing costs are involved with getting a HELOC?
Upfront closing costs to get a HELOC range from 1% to 4% of the loan amount. Some lenders may advertise no closing costs, but you’ll typically get a much higher interest rate that can leave you paying more interest fees over the long run.
Closing costs commonly include the following items:
- Lender origination, application, or underwriting fee: Lenders may charge a fee for the time needed to evaluate your loan application. This fee may also be referred to as an origination, application, processing, or underwriting fee.
- Title search fees: A title company will assess this fee as part of the process of verifying the current owner of the property, as well as any outstanding liens that may impact your eligibility to get a HELOC.
- Flood certification fees: Properties located in a flood zone may need additional insurance depending on the lender. This fee covers the costs associated with verifying whether your property is located in a designated flood zone.
- Appraisal fees: Lenders will require that an appraisal be done to determine the value of your property. Different types of appraisal exist, and range from a physical inspection of the interior and exterior of the home to a computer-generated estimate.
- Credit report fees: Lenders incur a fee for obtaining a copy of your credit report. This fee is often passed on to you as the borrower.
- Government recording charges: When you get a HELOC, lenders will record the loan in public records as a lien against the property. As part of this process, many counties charge a fee to the lender, the cost of which is then passed on to you as the borrower.
What are the ongoing fees for a HELOC?
Depending on the lender, additional fees may apply even after the loan is opened. Be sure to review the terms and conditions of your specific loan. Below are some examples of common fees that can apply:
- Inactivity fee: Some lenders may charge an inactivity fee if you do not use your HELOC for a certain period of time. If a lender does charge this fee, it typically won’t apply until at least six months of inactivity.
- Early closure or prepayment penalty: If you decide to close your HELOC within a certain period of time or pay off the loan early, your lender may charge you this fee. This is commonly seen with lenders that cover your closing costs for getting a HELOC.
- Annual fee: Some lenders charge an annual or monthly fee to cover the costs of maintaining your HELOC account.
- Minimum draw fee: Some lenders issue HELOCs with a minimum required draw amount. If you decide to draw less than the designated minimum, you may be charged a fee.
Can you use a HELOC for anything?
Funds drawn from a HELOC can be used for just about anything. In fact, tapping your home equity for funds can be a smart financial move. It can help you achieve many of your personal, professional, and financial goals. However, using a HELOC also carries some risk in the sense that you could lose your home if you are no longer able to afford the monthly payments. Because of this risk, you should carefully consider the benefits and risks of using your HELOC for certain expenses.
