Leverage your home equity with 5 creative HELOC strategies

A home equity line of credit (HELOC) is a financing tool that can provide ultimate flexibility to an eligible borrower. That’s because, unlike a home equity loan or another type of financing, you don’t have to repay it immediately or take a lump sum upfront. Plus, you can use the funds for a variety of purposes.

That begs the question: What is the best HELOC strategy? How can you best put that money to use in ways that make the most financial sense? Read on to learn different approaches you can take with a HELOC.

In this article (Skip to...)

• HELOC defined
• HELOC uses
• HELOC for renovations
• HELOC for debt payoff
• HELOC for mortgage payoff
• HELOC for home purchase
• HELOC as a checking account

What is a HELOC?

A HELOC is a revolving line of credit that requires putting up collateral to obtain. But instead of using your primary residence, you can use the investment property as collateral. That’s if you’ve already purchased it and have accumulated a sufficient amount of equity in the property—typically 15% to 20% minimum. If not, you can use your primary residence as collateral for the HELOC. That’s if you have the minimum equity threshold accrued.

With a HELOC, you have a draw period, commonly spanning the line of credit’s first 10 years. Over this time, you can extract money from your line of credit any time you want, provided you don’t exceed your set credit limit. During the draw period, you are only obligated to make minimum payments on any owed interest for the funds you elect to borrow. Borrow no money and you will owe nothing (unless your lender assesses an inactivity fee). After your draw phase concludes, you aren’t allowed to borrow additional cash unless your lender authorizes a HELOC renewal.

The next phase is repayment, often lasting 10 to 20 years. That’s when you must pay back your owed balance.

What can you use a HELOC for?

You can use your tapped equity funds via a HELOC for virtually any reason. That can be paying for a home renovation, consolidating debt, or even purchasing another home.

“There are no specific restrictions on the use of these funds, so long as they are not used for illegal activities,” says Sam Silver, a Realtor, investor, and lender.

Still, it’s smart to devote HELOC dollars to an endeavor that can help you save or grow your money long-term. Don’t use a HELOC if it will significantly increase your debt beyond your means of proper repayment and risk your finances. That’s why some HELOC strategies are more recommended than others.

HELOC strategy #1: Using a HELOC for renovations

One of the most popular reasons for getting a HELOC is to help pay for a home improvement project. This can be a remodel that increases your home’s equity.

“Using your HELOC to finance home improvement projects is a great way to add value to your house. The funds can pay for anything from updated appliances to bathroom or kitchen redos. This can benefit your family and increase your home’s market value,” says Bryan Toft, Chief Revenue Officer for Sunrise Banks.

Ruth Shin, Founder/CEO of PropertyNest, believes a HELOC is particularly beneficial for large and extensive renovations.

“A HELOC’s main advantage is its relatively low interest rate compared to other financing options, including credit cards,” she notes. “With rates on the rise, today’s financing rates aren’t what anyone would consider very low. However, homeowners might find this is one of their best options. It’s easier to qualify for a HELOC than other non-home equity type borrowing.”

Silver says this HELOC strategy, or any of the following strategies, is best for homeowners who have a stable income, good credit, and can make regular payments on the HELOC.

HELOC strategy #2: Using a HELOC to pay off debt

It’s also common for borrowers to use a HELOC to consolidate or pay off non-mortgage debt. This can be an outstanding balance on a credit card with an exceedingly high interest rate. Per the Federal Reserve, the average credit card APR is over 20% nowadays.

“Taking advantage of the lower interest rates through a HELOC might be a good option for those looking to get a better deal on their monthly payments. It also might offer a way to pay off their debts faster,” Toft suggests.

Zev Freidus, President of ZFC Real Estate, says using cheaper money to pay off expensive debt makes sense.

“But I recommend, when using a HELOC to pay off a credit card or other higher-interest debt, stop using that credit card until you pay off the HELOC,” he says.

HELOC strategy #3: Using a HELOC to pay off a mortgage

Another HELOC strategy is to direct your HELOC cash toward your existing mortgage loan. You can also use it to fund your monthly mortgage payment or to help pay off your mortgage loan faster.

“This method is recommended for people who don’t have a lot left to pay off on their mortgage and if you can ensure that your HELOC interest rate will be lower than your current mortgage rate,” Shin explains.

Problem is, most HELOCs have variable rates that can adjust over time. Even if your adjustable-rate HELOC currently boasts a rate lower than the rate you are paying for your mortgage loan, there’s no guarantee it won’t exceed your mortgage rate down the road. That’s why this HELOC strategy may only be best if you have a HELOC with a fixed rate lower than your current mortgage rate, which isn’t likely, although it’s possible.

A better alternative may be to refinance your mortgage loan, but only if you can secure a lower fixed rate than you are currently paying.

Still, “paying off your mortgage with a HELOC can be better than refinancing because the latter can involve a more rigorous process with high fees,” adds Shin.

HELOC strategy #4: Using a HELOC to buy or finance another house

Interested in purchasing another property? Consider using a HELOC for your down payment or to cover closing costs.

“This could be a good use of the HELOC. If you write a check against your HELOC for a down payment of 20%, you may be able to finance the balance of your purchase at more favorable terms. Plus, by combining HELOC funds with the new mortgage, you are essentially acquiring a new property with no money down,” Freidus continues. “Once your property has time to season, you can refinance and use the proceeds to pay off your HELOC. This accomplishes two things. First, it allows you to lock in your rate, and second, it frees up your HELOC to be used again for another property. Keep doing this, and there is no limit to the number of real estate assets you can acquire.”

Or you can use your HELOC to make mortgage payments on your second home, “which makes sense if the interest rate is lower on your HELOC,” says Shin.

When applying this HELOC strategy, be sure you are not taking on more debt than you can afford.

HELOC strategy #5: Using a HELOC as a checking account

Like your checking account, your HELOC can be used to pay for things only when needed, with the funds available on demand. Or, you can pad your checking account with HELOC dollars.

“HELOC funds can be transferred to your checking account to be used with your paper checks or debit card. Similarly, you can transfer funds from your checking account to pay down your HELOC,” says Toft. “But remember that you’ll need to make monthly interest payments on the HELOC as you would with a credit card.

However, it’s not recommended to use your HELOC for daily/everyday expenses, frivolous transactions, or luxury purchases.

“Doing so can more quickly erode the equity in your home, which is your most valuable and important asset. As with any other form of debt, a HELOC should ideally be used for something that will generate a greater return than the cost of the debt,” cautions Freidus.

Is a home equity line of credit a good idea for me?

Whether or not HELOC is the right financing vehicle for you will depend on several factors. Those include your financial situation, ability to qualify for the HELOC, and current rate environment.

“In general, HELOC funds can be beneficial to borrowers looking to make major transactions that will benefit them in the long run, such as paying for home improvements,” Toft recommends.

If you are financially responsible, it can be worthwhile to get a HELOC, even if you don’t need it today. That way, you can tap into your home’s equity if and when the time is right. (Note that some lenders may charge an inactivity fee if you do not use your HELOC within a given period.)

“Rates are currently high across the board for all types of loan, including HELOCs. However, with good credit, you should be able to get approved at a lower rate,” Shin says.