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6 surprising uses for a HELOC (and 4 to avoid)

Home Equity Lines of Credit – HELOC is shown on the business photo
A HELOC can be a smart financial tool to tap into right now and there are many surprising ways to use one. Getty Images/iStockphoto

If you're a homeowner, you may have built up significant equity in your home over the years as your mortgage balance decreased and your property value increased. After all, the average homeowner has a lot of home equity to tap into right now, and a home equity line of credit (HELOC) could be the right option for doing so. 

Rather than offering a lump sum of cash, a HELOC works like a credit card, allowing you to access funds up to your pre-approved credit limit as needed. As you pay back the principal, that amount is revolved back into your available credit line during the draw period, which gives you some flexibility with your borrowing. The variable-rate nature of a HELOC also allows you to capitalize on any future rate drops that could occur. 

And, while one of the most HELOC common uses is to fund home renovations, there are several other surprising ways to put your HELOC funds to use. Below, we'll break down a few savvy uses for a HELOC, along with some instances where a HELOC may not be the best option.

Explore your top HELOC options today.

6 surprising uses for a HELOC

There are a few smart but surprising ways to use the funds from your home's equity, including:

To fund a small business 

Starting a new business can be a good way to build wealth, but it often requires capital for expenses like equipment, inventory, marketing and payroll. A HELOC can provide those types of start-up funds while keeping your personal and business finances separate. 

That said, it's important to note that a large percentage of small businesses fail within the first year, and since your home is used as collateral, this plan comes with some risk. So, if you're going to take this route, just be sure you have a solid business plan to generate enough cash flow to repay what you borrow.

Find out more about how a HELOC could benefit you here.

To bridge a job transition 

If you're planning to change careers, which many people are doing in today's job market, or if you plan to start your own business, borrowing from a HELOC can help bridge any gaps in income during the transition period. And that, in turn, can make it possible to accomplish those types of career goals without having to stress about having the money for bills.

To build an accessory dwelling unit

With many areas now allowing homeowners to build rental units on their property, using a HELOC to construct an accessory dwelling unit (ADU) like an in-law suite or carriage house can be a smart move. Not only can this type of addition to your home be a selling point if or when you put your property on the market, but it can also create an income stream to repay the loan. 

For example, if you live in an area that's popular with tourists and you use your HELOC funds to finance the construction of an ADU above your garage. You could then list it as a short-term vacation rental and recoup what you paid to build it. 

To pay for education 

Paying for your children's college tuition or pursuing an advanced degree yourself can get very expensive. But a HELOC is one way to cover education costs beyond what's available through student loans, grants and savings. And, the interest may also be tax-deductible if used for qualified higher education expenses, so there may be a tax break available to you if your HELOC funds are used for this purpose.

To make a major purchase 

If you're looking to buy a boat, RV or another large purchase that doesn't conventionally qualify for a loan, a HELOC can be a smart way to finance these purchases. Not only can you use your HELOC for just about any type of purchase, but considering that conventional loans are hard to come by for these types of purchases, you can often do so at a lower interest rate than you would get by financing through the seller or using a credit card to cover it.

To invest in real estate 

It's also possible to use a HELOC to purchase and renovate investment properties, and there can be big benefits to doing so. For example, the interest is typically tax-deductible, and you can continuously re-leverage your equity as home values increase, allowing you to invest in other properties and build more wealth. 

That said, you should be cautious about over-leveraging yourself if you want to take this route, as your home is on the line if you're unable to repay what you owe.

3 HELOC uses to avoid

And, as you consider borrowing with a HELOC, you may want to avoid doing so for these purposes:

To purchase rapidly depreciating assets

Taking equity out of an appreciating asset like a home to buy rapidly depreciating assets like cars or electronics is generally not advisable. Unless it's an absolute necessity, you're better off paying cash for depreciating purchases.

To make speculative investments 

Using a HELOC to invest in highly speculative assets like cryptocurrencies or extremely volatile stocks is an unwise gamble. The risk of loss is too high to gamble on in these cases, and if your investments tank, it could leave you underwater on the loan.

To support an unsustainable lifestyle 

Tapping home equity with a HELOC to artificially inflate your lifestyle beyond what your regular income can sustain is a risky move. You could quickly dig yourself into a debt hole that leads to foreclosure, so rather than using a HELOC to sustain a lifestyle you can't afford, it's typically smarter to pull back and create a realistic budget that works for your finances.

The bottom line

There's an element of risk any time you borrow against the equity in your home. However, a HELOC can be a useful financial tool when deployed responsibly and for the right reasons. By exploring the surprising use cases outlined above and steering clear of the inadvisable ones can help you leverage your home equity wisely.

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