It’s not uncommon for lenders to offer a low promotional rate for six months to a year. HELOCs typically have variable rates, and the most relevant figure to you as a borrower is the APR, or annual percentage rate. If a HELOC is your only option for paying for a vacation or another big-ticket item, better to put the purchase on hold. A Caribbean cruise or a gaming console, on the other hand, will be long forgotten even if you’re paying it off for decades. Going on vacation or buying electronics: Hard no. Real estate is a long-lived asset that will give you years of use and almost certainly gain value.Federal loans have lower rates and more safeguards around financial hardships, so there’s no hurry to pay them down. In contrast to federal loans, private student loans carry higher rates and less flexibility. If you owe student loans from private lenders, it can make sense to pay those down by tapping home equity. Paying down student loans: Maybe. This one is a bit of a gray area.However, using a home equity line of credit at 7.5 percent today probably isn’t ideal. Investing: Probably not. Tapping home equity at 3 percent to fatten up your retirement savings made sense.
Otherwise, you’ll have the unfortunate combination of less home equity and an overhang of credit card balances. This strategy comes with a big caveat, however: Pull cash out of your house to pay off the credit cards only if you’re not going to simply run up more debt.
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However, be careful about using HELOCs to add a swimming pool or tennis court - these additions are expensive, and homeowners usually don’t recoup the full amount of the investment. If you need a new air conditioner, for example, a HELOC is cheaper than carrying a credit card balance. These upgrades add to functionality and (generally) the resale value of your home. Home improvements and repairs: Yes. Using home equity to pay for kitchen renovations and bathroom updates is a no-brainer.A few options, and whether they make sense:
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That’s a lot of financial freedom, so it’s useful to have some guidelines about how to spend the money. You can use the proceeds from your HELOC for anything. The variable payments can also create financial challenges. You can no longer withdraw funds.Ī word of caution: With a line of credit, it can be easy to get in over your head by using more money than you are prepared to pay back. Once the draw period ends, there’s a repayment period, during which interest and principal must be paid. During that time, you can make interest-only payments. HELOCs generally have a variable interest rate and an initial draw period that can last as long as 10 years. Another is that HELOCs currently have single-digit interest rates, compared to the 16 percent or more you’ll pay if you carry a balance on a credit card. One is that the amount you can borrow on your HELOC is likely to be higher than the balance limit on your credit card (think five figures instead of four). However, a HELOC has some benefits over credit cards.
It works much like a credit card - you are able to use it as needed, repay the funds and then tap it again. A HELOC is a revolving, open line of credit.
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