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How To Use A Home Equity Line Of Credit

How To Use A Home Equity Line Of Credit

Owning a home provides numerous benefits ranging from applying mortgage interest as a tax deduction to calling your own shots when it comes to making changes. One of those benefits is that when mortgage payments are made some percentage of that payment is applied to the original loan amount. As the loan gets paid down the difference between what you owe and what the home is worth is called equity. Building equity in a home is realized as a lump sum amount when the home is sold but before that time it can also be used to take out a loan. This loan is called a home equity line of credit and it can be used for many different purposes.

Home Remodeling

Remodeling or renovating a home is an excellent use of a HELOC since it not only increases the homes' value but is also something tangible which you and your family can enjoy. Redoing a kitchen or bathroom or landscaping the backyard provides daily benefit and are improvements which will add to the resell value of the home. While not necessarily a dollar to dollar direct correlation in the increase in resell value it is still a net positive. So if you spend $10,000 to remodel a kitchen you may not necessarily get a $10,000 increase in the home's value but it will still be a significant increase and you get to enjoy your new kitchen for as long as you live there.

Debt Consolidation

Home equity lines of credit often have significantly lower interest rates than other types of consumer credit like auto loans and credit cards. By using home equity to consolidate higher interest rate debt you actually pay yourself twice which is always a smart thing to do. This is because not only are you paying less in interest by consolidating high interest rate debt down to a low interest rate HELOC but you also get a tax benefit. A home equity line of credit, much like a home mortgage, has an interest expense which is tax-deductible. This tax deduction lowers your adjusted gross income which means you pay less on your personal income taxes. Saving money on credit card interest and saving money on taxes sounds like a win-win to me.

Business Financing

Using a home equity line of credit to fund a business venture when other forms of business financing are unattainable or unrealistic is another possible opportunity. This use of a HELOC however is more risky because unlike remodeling and debt consolidation there is no tangible benefit. You don't get to use it like a new kitchen and you don't get to save money on lower interest. The inherent risk is that someone could take out a $50,000 home equity line of credit and use it to fund a business venture which then in a relatively short period of time fails. Not only do you still have your original mortgage to make payments on but now you have an additional line of credit to make from the failed business. That's not to say it is a bad idea to use a HELOC to fund a business but some financial institutions limit what you can use a home equity line of credit for and business financing may not be allowed.


There are many different uses for a home equity line of credit and how you use it will determine the benefit you receive. The best use for a home equity line of credit is to invest in your existing residence through a remodel or by consolidating high-interest rate debt into a low interest rate HELOC. Using a home equity line of credit for anything other than these two purposes such as buying a car, going on a vacation or generally just wasting it is inadvisable. Like all financial decisions and all loans, ask as many questions and get as much information as possible prior to assuming a new obligation. The more informed you are the better you will be in the long run.

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