Can You Use a HELOC for Anything? Common Uses

A Home Equity Line of Credit (HELOC) provides a flexible way to borrow against the equity built in a home. It functions as a revolving line of credit, similar to a credit card, but is secured by the borrower’s home equity. This means funds can be accessed, repaid, and re-accessed up to an approved limit over a specified period.

Common Uses of a HELOC

HELOC funds can be used for a wide range of purposes, with common applications including:
Home improvements or renovations, such as updating a kitchen, bathroom, or adding new rooms, which may also increase the home’s value.
Debt consolidation, especially for high-interest obligations like credit card balances. Consolidating these debts into a HELOC can result in a lower interest rate, potentially reducing monthly payments and overall interest costs.
Funding education expenses, including college tuition, books, or housing. A HELOC may offer more favorable interest rates compared to private student loans.
Large planned purchases, such as a new vehicle, a significant vacation, or a down payment on another property.
Establishing an emergency fund, providing access to cash for unexpected medical bills or other unforeseen financial challenges. This offers a safety net without immediately incurring interest charges until funds are drawn.

Accessing HELOC Funds

Borrowers have several methods to access their available HELOC credit.
Special checks provided by the lender function similarly to personal checks and can be written up to the available credit limit. This allows for direct payments to vendors or for cash withdrawals.
A dedicated credit card linked directly to the HELOC account can be used for purchases at merchants or for cash advances at ATMs.
Electronic transfers allow borrowers to move funds from their HELOC to a linked checking or savings account through online banking portals or mobile apps.
Direct withdrawals can often be made at a local branch of the lending institution. Some lenders also permit phone requests for fund transfers.
Some HELOCs may have minimum draw amounts or require a minimum outstanding balance.

Key Financial Aspects of HELOC Use

HELOCs feature a variable interest rate, meaning the rate can fluctuate over time. This rate is commonly tied to a published index, such as the U.S. prime rate, plus a margin set by the lender. As the prime rate changes, so too can the interest rate on the HELOC, potentially affecting monthly payment amounts. Some lenders may offer the option to convert portions of the variable-rate balance to a fixed rate, providing more payment predictability.

A HELOC operates in two distinct phases: the draw period and the repayment period. The draw period, usually lasting 5 to 10 years, allows the borrower to access funds as needed, repay them, and borrow again up to the credit limit. During this phase, payments are often interest-only on the amount borrowed, though some plans may require a portion of the principal.

The repayment period begins once the draw period ends, typically lasting 10 to 20 years. During this time, the borrower can no longer draw funds and must begin making payments that include both principal and interest on the outstanding balance, which can lead to significantly higher monthly payments.

The amount of credit available through a HELOC is determined by a calculation involving the home’s appraised value, outstanding mortgage balance, and the lender’s loan-to-value (LTV) limits. Lenders typically allow borrowing up to 75% to 90% of the home’s value, minus any existing mortgage debt. For example, if a home is valued at $300,000 and the lender’s LTV limit is 85%, the maximum combined debt (mortgage plus HELOC) would be $255,000. If the current mortgage balance is $200,000, the available HELOC would be $55,000.

Interest paid on a HELOC may be tax-deductible under Internal Revenue Service (IRS) guidelines. For loans taken out after December 15, 2017, and through 2025, the interest is deductible only if the borrowed funds are used to buy, build, or substantially improve the home that secures the loan. This deduction is subject to overall mortgage debt limits, generally up to $750,000 in combined home acquisition debt for married couples filing jointly. The interest is not deductible if the funds are used for purposes unrelated to home acquisition or improvement, such as debt consolidation or education expenses.