3 ways to use a HELOC this summer (and 3 ways not to)
Interest rates have been high the past few years, but lately, rates have been declining, particularly on home equity lines of credit (HELOCs). In fact, rates on these products are actually averaging lower than those on home equity loans right now, and that's rare.
Even better? HELOCs offer more flexibility than home equity loans, as they work more like a credit card than a lump-sum loan. You're given access to a line of credit tied to your home equity, and then you have the option to withdraw funds as you need them over a long period of time.
Still, there are risks along with the perks. One major risk is that HELOCs use your home as collateral, meaning you could face foreclosure if you don't make payments on what's owed. For this reason, you should use these products carefully and only for the right reasons if you're planning to take out a HELOC this summer.
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3 ways to use a HELOC this summer (and 3 ways not to)
Here's what experts say you should — and should not — use a HELOC for this summer.
Yes: To take advantage of falling rates
The latest projections show that experts believe it's likely that the Federal Reserve will cut interest rates two times later this year. If that happens, it would likely mean lower rates on consumer borrowing products, too.
On fixed-rate products — like home equity loans, for example — that rate drop won't matter much unless you wait to take your loan out until rates drop. But for those interested in HELOCs, which usually have variable rates, it can be great news. Were the Fed to reduce rates, it would likely mean the rate on your HELOC would drop, too, sending your payments down with it.
"Most HELOC rates are directly tied to the federal funds rate," says Darren Tooley, team sales manager at Union Home Mortgage. "With the Fed starting to ease rates, tapping into your home's equity for projects like home improvements, debt consolidation, or other necessary means can be very financially sound."
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No: To fund a summer vacation
While it might be tempting to use a HELOC to jet-set across the world this summer, experts advise against leveraging your home for extraneous items like this. Put simply: "It carries risk," Tooley says.
"Homeowners should avoid using a HELOC for any non-essential items or expenses," Tooley says. "It won't necessarily generate a financial return and could leave you with long-term debt for a short-term indulgence."
Yes: To consolidate credit card debts
HELOCs are a common tool for consolidating debts. But in today's rate environment, they can be particularly helpful if you have lots of credit card debt.
That's because credit card rates are sitting at an average of over 21% currently. HELOCs, on the other hand, have an average rate of just over 8% — much lower than credit card rates.
In short: By using a HELOC to pay off your credit card balances, you could save a significant amount of interest in the long run. Just make sure you have a plan to pay off your HELOC, and you should ideally do so before it can rack up too much interest.
"Any time you use debt to pay off debt can be tricky," says Christina McCollum, producing market leader at Churchill Mortgage. "Be careful."
No: To build a pool
Throw this one in with summer vacations as a "non-essential" you shouldn't use HELOCs for. While a pool might be nice to cool off in when the days get hot or even make your home more valuable to your family, not all buyers will feel that way, and it could even hurt your home value in the long run.
"Building a pool for your home may not necessarily increase the value in the home and in certain markets could negatively impact you if you try to sell," Tooley says. "Some homeowners view a pool as a nuisance or unwanted financial burden."
Pools also increase your home insurance costs, as they require higher levels or different types of coverage.
Yes: To tackle that summer to-do list
If you have a long honey-do list of home repairs, maintenance tasks and maybe even renovations, a HELOC can be a good choice to help you tackle those, experts say.
For one, the Internal Revenue Service (IRS) lets you write off the interest on these loans if you use the funds to "buy, build, or substantially improve" your house. But more than this? It can also increase your home's value in the long run, meaning more profits when it's time to sell.
"Any time you use a HELOC to put money back into your home or for real estate, you can never go wrong," Tooley says.
Maybe: To cover college costs
If you have a child who's heading off to school in the fall, you might be tempted to tap your home equity to pay that tuition bill. This might be a good option, but it depends on what other choices are at your disposal.
If you can cover college costs out of savings, experts say, then taking out a HELOC isn't wise. You also wouldn't want a HELOC if your child can secure enough federal student loans to cover the cost, as they would likely have lower interest rates than HELOCs. (The current federal student loan rate is 6.53%.)
If you'd need to take out private student loans, though, which typically have higher interest rates than federal student loans, then using a HELOC might be a smart option. Just make sure you do the math. If the rate and payment are drastically different than what you'd get on a student loan, it may not be worth it.
"If this is the case, you are better off avoiding using your home as collateral to cover college costs with other affordable options available," Tooley says.
Maybe: To buy a new house
If you're looking to buy a new house this summer but don't want to sell your current one until after you've found your next place, a HELOC might be able to help.
"Some borrowers are using HELOCs for their down payment on their next home, taking some cash out to get them to the finish line," McCollum says.
If you do this, make sure you have a plan to pay off the HELOC once your old home sells — and stick to it. Otherwise, you could find yourself tempted to spend more of the line, racking up additional debt in the process.
The bottom line
Before taking out a HELOC, make sure you understand the risk these products come with. For one, HELOCs use your home as collateral, so if you can't make your payments, you could lose your home to foreclosure.
"While a HELOC can be a helpful product, at the end of the day, it is still additional debt," McCollum says. "Considering the higher payments that generally accompany HELOCs, ensure those payments will fit into your budget before you move forward."
Also, remember that HELOCs typically come with variable interest rates, so there's a good amount of uncertainty when it comes to your payments, especially in today's economy.
"How the U.S. and global economy will react to the potential of tariffs and other economic factors is still up in the air, as we are only in the early stages of recognizing its impact. The worst-case scenario would be that we do see a rapid economic slowdown, which isn't paired with lowering rates but rather an increase in rates, which could leave homeowners in a very unfortunate situation," Tooley says.
If that's a risk you're unwilling to take, a home equity loan could be a better option. These come with fixed rates, giving you a consistent monthly payment for your entire loan term. Talk to a loan officer if you're not sure which home equity option is best for your goals.
