A HELOC can help you use the equity from your home to finance major purchases. There are other ways to turn equity into cash — like cash-out refinancing and home equity installment loans — but HELOCs are often considered the most flexible and cheapest method to unlock equity.
Advantages of a HELOC
One of the best things about tapping home equity is that it allows you to get cash fast without selling the house you’re living in. Because the borrowing is secured, you’ll likely be offered an affordable interest rate. Depending on factors like your credit score, location, and the value of your property, the interest on your HELOC could cost less than half of other unsecured financing alternatives. So unless you can qualify for the lowest credit card or personal loan rates, paying for something big with a HELOC makes financial sense.
Similar to a home equity installment loan, a HELOC is a second mortgage. The difference between the two is that a HELOC acts like a credit card — you can borrow what you need, pay down the balance to replenish your credit, then borrow again. Since you’ll only be charged interest if you use the credit line, some homeowners take out a HELOC to use as their emergency fund.
Aside from preparing for the unexpected, here are five other ways you can put a HELOC to good use.
Homeowners often turn to HELOCs for renovations because they don’t know exactly how much they’ll need at the start of their project. Rather than taking out an installment loan and incurring interest right from the beginning, you can arrange a HELOC so you have a ready supply of fast cash up to your approved limit, then draw on the credit line as needed.
While many owners renovate so they can enjoy their home more, others make changes to improve its value. You could boost the wow factor of your home by installing a new roof, modernizing the garage, or remodeling the bath or kitchen, then recoup renovation costs when you’re ready to sell up.
There are tax advantages to tapping home equity for renovations too. Interest charged on the HELOC is tax-deductible if the loan is used to substantially improve your property. You can deduct interest on up to $750,000 of qualifying loans.
Although some people suggest you should always use borrowed money for assets that appreciate in value, a motor vehicle offers value-in-use that could actually increase wealth. This is particularly the case if you need to drive to and from work, or if having access to a vehicle is integral to doing your job. If your family is getting bigger, then upgrading your vehicle may be necessary to keep everyone moving.
Since the interest rate on a HELOC is typically cheaper than what you’ll get with auto loans, financing your vehicle purchase with a HELOC is likely to result in lower interest payments.
Pay off debt
If you’re struggling to keep up with repaying multiple debts, say from credit cards, student loans, and personal loans, then consolidating them into a single debt is a great way to make life easier.
Where you have high-interest debt outstanding, tapping home equity to pay them off could result in significant savings. Interest rates on debt consolidation loans are often twice as high, so a HELOC could help you eliminate debt much faster.
Furniture / Electronics
The pandemic has changed the way we work as many Americans now routinely work from home. If you need to invest in the right furniture and electronics for your home office, then financing them with a HELOC is a far better alternative than racking up a large credit card debt.
Unless you apply for a credit card with a low introductory rate and you pay off the balance within the promotional period, you’ll likely end up paying a lot of interest. The average credit card rate often exceeds the average HELOC rate.
Many homeowners start or expand their business with a home equity advance. It allows them to invest in the right tools and equipment without having to apply for a business loan. Qualifying for business financing with a traditional lender is difficult — you’ll typically need good personal credit, a business track record, and detailed plans to support your loan application.
Since lenders aren’t usually concerned about how you use your home equity line of credit, you can get the equipment you need and take advantage of business opportunities much faster.
How much equity can I draw?
The amount of equity you have determines how much you can borrow. Home equity is the difference between the current market value of your house and your outstanding mortgage.
If your property is worth $300,000 and your mortgage balance is $80,000, then your equity is $220,000.
The loan-to-value ratio, which is a different way to measure how much you owe on your mortgage, is $80,000 ÷ $300,000 = 26.67%
When you apply for a HELOC, lenders look at the combined loan-to-value (CLTV) ratio and typically want this to be 80% or less.
Continuing with our example, you’ll reach a CLTV of 80% if you have $240,000 of combined loans outstanding. Since you already have a mortgage balance of $80,000, you can take out a maximum of $160,000 home equity line of credit before reaching the $240,000 limit.
HELOC vs cash-out refi
The main difference between a cash-out refi and a HELOC is that the former doesn’t necessarily involve a second loan. Instead, you refinance your mortgage for a larger sum than what you owe so you can take the difference in cash. Here are some factors to consider when deciding between these two options:
HELOCs are typically divided into a draw period and a repayment period. You can make multiple draws during the draw period up to your approved limit and make interest-only payments. The outstanding balance at the end of this period becomes a loan you repay with interest. In contrast, a cash-out refi loan disburses a fixed amount, so you’ll have to know how much you need upfront.
Closing costs for a cash-out refi can be high while there are no closing costs for a HELOC.
If you refinance when mortgage rates increase, you could end up paying a lot more interest compared to your current home loan.
Ultimately, the best financing strategy often comes down to what you’re using the money for and whether you need the entire balance immediately.
How a HELOC from Figure works
With an advanced lending platform that’s powered by blockchain technology, you can expect faster and cheaper loans with Figure. The HELOC application process is 100% online — so you can get approved in five minutes with no in-person appraisal needed and secure your home equity line in as little as five days3.
Figure HELOCs range from $20,000 up to $400,000, with terms from five to 30 years. You could be eligible to borrow up to a CLTV of 85% if you have strong credit. Figure offers one of the lowest HELOC rates on the market. What’s more, Figure’s HELOC rates are fixed, so if interest rates change, the new rate will only apply to new draws.
Figure charges a one-time origination fee only, so there are no account opening fees, maintenance fees, closing costs, or prepayment penalties.
If you’re ready to turn your home equity into cash, apply for a HELOC with Figure today!
1 You should always consult a tax advisor regarding the deductibility of interest and charges to your home equity line of credit.
2 The Figure Home Equity Line is an open-end product where the full loan amount (minus the origination fee) will be 100% drawn at the time of origination. The initial amount funded at origination will be based on a fixed rate; however, this product contains an additional draw feature. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will be set as of the date of the draw and will be based on an Index, which is the Prime Rate published in the Wall Street Journal for the calendar month preceding the date of the additional draw, plus a fixed margin. Accordingly, the fixed rate for any additional draw may be higher than the fixed rate for the initial draw.
3 For the Figure Home Equity Line, approval may be granted in five minutes but is ultimately subject to verification of income and employment. Five business day funding timeline assumes closing the loan with our remote online notary. Funding timelines may be longer for loans secured by properties located in counties that do not permit recording of e-signatures or that otherwise require an in-person closing. In addition, funding timelines may be longer if we cannot readily verify that your property is in at least average condition with no adverse external factors with a property condition report and need to order a desktop appraisal to confirm the value of your property.