MORTGAGE
8 Things Not to Use a HELOC For
What You'll Learn: Benefits and risks of using a home equity line of credit
EXPECTED READ TIME:5 minutes
June 31, 2023
8 Things Not to Use a HELOC For
Home Equity Lines of Credit (HELOCs) provide homeowners with a flexible financing option, leveraging the equity in their homes. While HELOCs can be a valuable tool, it's crucial to understand their limitations. Should you use your home equity to buy a car? What about a HELOC to pay off credit cards? Here are eight expenses that are not ideal for using a HELOC.
1. Your honeymoon (or other luxury trips)
Using a HELOC to finance luxurious vacations or extravagant trips is not advisable. While it may be tempting to use your home equity for travel, it's important to remember that vacations are discretionary expenses. It's recommended to save separately for vacations and use a HELOC for more substantial investments or necessary expenses.
2. Risky investments
HELOCs should not be used to fund speculative or high-risk investments. Investing in volatile markets or ventures with uncertain returns – or using a HELOC to invest in anything for that matter – can put your home and financial stability at risk. It's crucial to allocate appropriate funds for investments and seek guidance from a financial advisor to explore more suitable investment financing options.
3. Daily living expenses
Using a HELOC to cover daily living expenses, such as groceries, bills, or routine costs, is not an optimal use of home equity. HELOCs are better suited for larger, planned expenses or investments. For managing daily living expenses, it's advisable to establish a solid budget and explore alternative financial solutions.
4. Consumer goods
Don’t worry, we’ve all bought stuff we don’t need. But financing unnecessary consumer goods, such as luxury electronics or a new car, with a HELOC generally is not recommended. These items often depreciate in value over time, and using a long-term loan like a HELOC for short-term enjoyment can lead to long-term debt. Typically, it's advised to use your home equity to invest in your home and to save separately for consumer goods or consider more suitable financing options.
5. Speculative business ventures
Using a HELOC as the primary source of funding for speculative business ventures is not advisable. Starting or investing in a new business involves risks, and relying solely on home equity can jeopardize your personal finances and property. Explore alternative funding options specifically designed for business ventures, such as business loans or lines of credit.
6. Some education expenses
While education is a valuable investment, using a HELOC to finance educational expenses is not always the most optimal choice. There are dedicated student loan programs and other financing options available that offer more favorable terms and benefits for education-related costs. While there are ways to use home equity to pay for college, student loans and other opportunities designed specifically to defray education costs are usually the first option.
7. Short-term luxury purchases
HELOCs are not intended for financing short-term luxury purchases like designer clothing, high-end jewelry, or extravagant home decor. These purchases tend to have a high depreciation rate and are better suited for personal savings or other forms of short-term financing. It's important to differentiate between essential expenses and luxury purchases when considering a HELOC.
8. Debt consolidation without a plan
While consolidating high-interest debt into a HELOC can be a viable option for some homeowners, it’s best to approach with caution. Consolidating debt without a comprehensive plan to address the root causes of debt can lead to a cycle of borrowing against home equity. It's crucial to have a clear debt repayment strategy and address spending habits to avoid falling into the same debt trap.
Borrow wisely
While a HELOC offers a flexible and convenient financing option, it's important to remember it means borrowing from yourself. So it’s essential to use it wisely and learn to love its limits. By understanding these limitations and making informed financial decisions, you can effectively leverage your home equity while safeguarding your financial future.