Best Ways To Use a HELOC

The Best and Worst Ways To Use a HELOC

A woman holds a toddler on the floor of a home.

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If you’re looking for flexible funding, you can tap into your home equity with a home equity line of credit (HELOC). A HELOC is a revolving line of credit that uses your home as collateral. Using a HELOC can be risky, so homeowners typically use them for major life expenses, not daily expenses.

Let’s learn about the best and worst ways to use a HELOC, along with alternative credit options that might better fit your needs.

Key Takeaways

  • Homeowners can use HELOCs to access equity for cash to pay for major expenses like home improvements and medical bills.
  • A HELOC uses your home as collateral, which can put your home at risk, so many homeowners do not use them for daily expenses.
  • Alternatives to HELOCs include personal loans and credit cards.

Best Ways To Use a HELOC

You can use a HELOC to help you improve your financial situation, like building equity or consolidating debt so you can pay it off faster or with lower interest. Here are some of the best ways to use a HELOC.

Home Improvements

One common way to use a HELOC is for home renovations and repairs. You draw on a HELOC whenever you need to and only pay interest on what you borrow. This gives you the flexibility to spread home improvement projects over years. You can also take advantage of tax deductions if you use HELOCs to substantially renovate your home.


Using a HELOC for home improvements can increase your property value. In this way, you use your existing equity to build even more equity. 

Debt Consolidation

If you have multiple high-interest credit balances, you can use a HELOC to pay down your debt faster and reduce the interest you pay. With a HELOC you can consolidate credit card and personal loans payments at potentially lower interest rates. Using a HELOC to consolidate debt can make your debt easier to manage. 

Higher Education

HELOCs can be used to cover the costs of a college education when federal student loans are not an option. Federal student loans have fixed, low-interest rates and offer benefits like loan deferment and loan forgiveness without putting your home at risk.

However, federal student loans have caps on the amount you can borrow. A HELOC may provide funding for tuition, housing, dining, and textbooks when you have maxed out your student loan options. 


Interest rates on HELOCS are generally lower than interest rates on student loans for graduate students, but higher than for undergraduate student loans.

Emergency Fund 

You can use a HELOC as an emergency fund for medical bills, car repairs, or other unexpected expenses. Having easily accessible funds can give you peace of mind when unexpected events, like losing your job, threaten your finances. And you won’t need to rely on credit cards or dip into your retirement savings.

Keep in mind that you’ll need to apply for a HELOC long before you need the money. HELOC applications can take weeks to process because they require a home appraisal and lenders need time to review your credit history.

Worst Ways To Use a HELOC

Your home is likely your most valuable asset. So, in many cases, like for unnecessary or smaller expenses, taking out a HELOC that uses your home as collateral is not worth the risk. Here are some examples of ways you want to avoid using a HELOC.

Luxury Purchases

Try to avoid using a HELOC for unnecessary expenses. Vacations, weddings, handbags, and other luxuries offer little to no long-term value, so they aren’t worth risking your home. Instead, consider saving toward your purchase goals and using cash, or using a credit card that provides rewards for luxury expenses.

Down Payment on a Home

You can use a HELOC as a down payment to buy a second home. While this has several advantages, like helping you preserve your savings, it also has disadvantages.


Using a HELOC for a down payment puts both your home and second property at a foreclosure risk if you default. Also, if the home you used to apply for the HELOC declines in value, you might end up owing more than what the house is worth. You won’t be able to use your equity again, such as for emergency expenses, until your HELOC is paid off.

Buy a Car

Using a HELOC to buy a car can offer you negotiating power and lower interest rates, but it may not be ideal because of the length of the repayment terms. HELOC repayment periods are usually between 10 and 30 years, which is significantly longer than car loan repayment periods.

If you pay off your HELOC quickly with no penalty, it may provide a more affordable financing option for a car. However, if you sell or trade in your car during the HELOC repayment period, you could be making payments on a car for longer than you own it.

Retirement Fund

Many older Americans use their home equity to fund living expenses in retirement. In doing so, they miss out on the opportunity to increase their home’s equity and have additional savings. Depending on your financial situation, HELOCs can be more difficult to repay if your income is lower, as it is for many people in retirement. 

Alternatives to HELOCs

HELOCs do tend to have lower interest rates, but there’s more to consider when choosing which type of loan is right for you. Here are some alternative credit options and why they could potentially be better suited for your needs.

Home Equity Loans 

A home equity loan also uses your home as collateral, but it acts more like a regular installment loan. With a home equity loan, you receive the funds in a lump sum payment. You may use a lump sum to make a one-time payment upfront, like for a kitchen remodel.


Like HELOCs, home equity loans benefit from tax deductions on the interest when the money is used to renovate your home. Unlike HELOCs, which have variable rates, these loans typically have fixed interest rates, making it easier for you to predict your monthly payments and budget accordingly.

Cash-Out Refinance 

If you’re looking for another way to borrow against your home equity, consider cash-out refinancing. A cash-out refinance allows you to pay off your existing mortgage with a larger loan and pocket the difference. 

A HELOC does not change your first mortgage. So, you could miss out on lower interest rates that could come from a cash-out refinance, dependending on the interest rate environment. Like a HELOC, you can use this extra money to pay for home upgrades, education, or emergency expenses.

Personal Loans

If you’re not willing to put your home up as collateral, a personal loan may be a better option for you. Personal loans can be unsecured and can be used for many of the same expenses as a HELOC, like debt consolidation and home improvements. Personal loans have relatively short terms in contrast to the 10-year draw period and 20-year repayment period common to HELOCs.

Credit Cards 

Credit cards will have a higher interest rate than a HELOC, but they are a better alternative if you need quick access to funds for emergencies or daily expenses. They tend to be more accessible than HELOCs because you don’t need to own a home or go through a lengthy application process. Credit cards can also give you cash-back rewards on purchases.

Frequently Asked Questions (FAQs)

How much can I borrow with a HELOC?

A HELOC lets you borrow a percentage of your home equity, i.e., the appraised value of your home minus your outstanding mortgage. You can typically borrow up to about 80% of your home’s equity, depending on the lender as well as your credit history, current debts, and other factors.

How long does it take to get a HELOC?

You can typically get a HELOC after unlocking 15% to 20% of your home equity. Typically, it can take up to 45 days to get approved and receive funds for a HELOC, depending on the lender and other factors.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. “Interest on Home Equity Loans Often Still Deductible Under New Law.”

  2. U.S. Department of Education. “Understand How Interest Is Calculated and What Fees Are Associated With Your Federal Student Loan.”

  3. Federal Trade Commission. “Home Equity Loans and Home Equity Lines of Credit.”

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