How to Use a HELOC

You have a HELOC, but now what? A home equity line of credit can be a flexible way to borrow against the equity in your home, but it works best when you understand how to access the funds, what to use them for, and how repayment may affect your monthly budget.

HELOC Defined

HELOC is short for home equity line of credit. HELOCs are secured by the equity in your home and give you access to a revolving line of credit. As you borrow and repay funds, the amount available on your line can go up or down based on your balance and credit limit.

How a HELOC Works

When you take out a HELOC, your lender will work with you to determine how much equity you have in your home and how much of that equity can be made available to you through a HELOC. Each lender is different, but it is common to allow you to borrow up to 90% of the value of your home. If you already have other loans against your home, the amounts of those loans will be deducted from the 90% amount to determine the amount of your HELOC.

Once established, accessing funds is easy. At Golden Belt Bank, you can use our online banking app to transfer funds from your HELOC directly into your checking account.

Common Ways to Use a HELOC

Before you use your HELOC, it’s important to remember that the loan is secured by your home. Borrowing more than you can comfortably repay can put your budget, and your home, at risk. HELOCs often have variable interest rates, which means your payment will change over time.

Home Improvements and Renovations

One of the most common ways to use a HELOC is for a home improvement project. The funds can be advanced as the project progresses, so you are only borrowing what you need as you need it. If you’re looking to make major upgrades to your home, a HELOC can be a flexible way to fund those improvements.

Debt Consolidation

You can also use your HELOC to pay down or pay off other debt. Before doing this, research your options and make sure you understand whether advancing funds at the HELOC interest rate is the right move compared to the interest rates on the debt you plan to pay off. You will also want to consider how long it will take to repay the advance. HELOC interest rates are often variable, meaning the interest rate could increase or decrease while you are paying off the funds you advanced to pay off other debt.

Education Expenses

You can use your HELOC to pay for education expenses, whether they are for your child or for yourself. A HELOC gives you the flexibility to borrow only what you need, when you need it. You can use the funds for tuition, books, housing, or other education-related expenses. Using a HELOC keeps the financing under the parent’s control and may help the student avoid taking on student loans.

Investment Opportunities

Sometimes you just need some seed money to start a side gig or small business. Using your HELOC may be an easier way to access funds for startup costs. Since the loan is secured by your home, the risk is lower to your lender than a small business loan where you may have no or very little collateral to offer initially. Opening a HELOC is a fairly simple process, so getting access to the funds you need may be quicker than waiting on a small business loan.

Smart Strategies for Using a HELOC

No matter what you decide to pay for with your HELOC, remember these tips.

Borrow only what you need. Easy access to funds means it’s easy to borrow for things we didn’t budget into our monthly expenses. Be sure you understand how your monthly payment will be affected when you advance funds.
Have a defined repayment plan. Often, the minimum payment required on a HELOC will not make a big dent in your principal balance or reduce it very quickly. Decide what you can budget for a monthly payment and stick to it. Avoid advancing more funds once your monthly payment is maxed out, and continue paying your budgeted amount as the line is reduced.
Monitor interest rate changes. With a HELOC, you will receive a monthly statement. Review the interest rate each month and make sure you understand how it can change. If you become concerned about the interest rate, check with your lender. HELOCs can often be converted into home equity loans, which can provide a period of interest rate protection, such as a fixed rate or an initial fixed-rate period.

If you’re wondering how to use a HELOC and whether it’s the right option for your next project or financial goal, reach out to one of our loan officers.