With the rise of property values in recent years, many homeowners are now sitting on a sizable amount of built-up equity. For some, a HELOC can be a powerful tool for leveraging this equity to meet their financial needs.
However, it’s essential to thoroughly evaluate your goals before tapping into home equity, as doing so might not always be the most ideal option for everyone. We’ll review some of the best uses for a HELOC, as well as situations where this type of mortgage may not be a good idea.
- HELOCs are best used to accomplish goals that improve your overall financial well-being.
- Some of the best uses for a HELOC include making home improvements, consolidating debt, and financing other property investments.
- Homeowners uncertain about how they’ll repay their HELOC, especially if interest rates increase, may be better off leaving their equity untouched.
What Is a HELOC?
A home equity line of credit (HELOC) is a second mortgage that works like a revolving credit line secured by your home’s equity. During the draw period (typically 5–15 years), you can borrow, repay, and borrow again—usually making interest-only payments. Afterward, the repayment period (up to 20 years) requires full principal and interest payments. Most HELOCs have variable rates, so your monthly costs can rise or fall over time.
How Much Can You Borrow?
Lenders usually allow you to access 80%–90% of your home’s value minus what you still owe on your mortgage. For example, on a $400,000 home with a $250,000 mortgage, you might qualify for about $110,000 in HELOC funds.
Basic Qualification Requirements
While standards vary, most lenders look for:
- Credit score around 680+
- Debt-to-income ratio of 43% or less
- At least 20% equity remaining in your home
How to Decide If a HELOC Is the Right Loan for Your Goal
A HELOC isn’t the right choice in every situation. Use this quick framework to see whether it’s a good fit for your goals.
If most of your answers fall under “Good Fit,” a HELOC can be a smart, flexible tool. If you see more “Poor Fit” responses, you may want to consider alternatives like a home equity loan, cash-out refinance, or personal loan.
Your Goal
- Good Fit: Long-term value, such as home improvements, consolidating high-interest debt, or paying tuition over time.
- Maybe: Covering short-term gaps like medical bills or serving as a backup emergency fund—only works if you have a clear repayment plan.
- Poor Fit: Lifestyle spending, such as vacations, cars, or day-to-day expenses. These add debt without building lasting value.
Cost Certainty
- Good Fit: Costs that are flexible or unpredictable, like phased renovations or semester-by-semester tuition.
- Poor Fit: Fixed, one-time costs where a lump-sum home equity loan would be simpler.
Time Horizon
- Good Fit: You have a repayment plan to pay off the HELOC within 5–10 years.
- Poor Fit: No clear strategy for repayment, which can lead to long-term debt and high interest costs.
Interest Rate Tolerance
- Good Fit: Comfortable managing variable rates and possible payment swings.
- Maybe: Prefer a fixed rate—some lenders let you lock in part of the balance.
- Poor Fit: Need predictable monthly payments and can’t manage variability.
Collateral Comfort
- Good Fit: Stable income and financial discipline to avoid overspending.
- Poor Fit: Unstable income or high risk of missed payments, since your home is on the line.
Tax Considerations
- Good Fit: Using funds for home improvements on the property securing the HELOC (interest may be deductible).
- Poor Fit: Using funds for education, debt consolidation, or personal spending, which typically don’t qualify for tax benefits.
The Best Uses for a HELOC
Now that we’ve covered how a HELOC works and what it takes to qualify for one, let’s look at some of the best and most commonly recommended uses for this type of mortgage.
Funding Home Improvements and Repairs
One of the most common uses for a HELOC is to fund major home improvements and repairs. This could include:
- Replacing a roof
- Installing a new HVAC system
- Renovating/modernizing
- Adding an accessory dwelling unit
- Making age or disability-related modifications
Since you can access your equity at any point during the draw phase, HELOCs are great for home projects that you plan to complete over time or for which you aren’t sure of the exact amount you’ll need to borrow.
Plus, if you use your HELOC to make value-adding improvements to your home, you may be able to deduct the interest payments from your taxes, as you can with your primary mortgage.
Keep in mind, however, that this requires you to itemize your deductions. Given the standard deduction of $15,750 for single filers and $31,500 for those married and filing jointly (for tax year 2025), itemizing may not be the best option for everyone.
Consolidating and Paying Off High-Interest Debt
Another popular and money-saving use for a HELOC is to consolidate and pay off other high-interest debts, such as credit card balances. With Forbes reporting a nationwide average credit card rate of 25.34%, many homeowners can reduce their monthly costs by consolidating into a lower-interest HELOC.
For example, if you carry a total of $50,000 in credit card debt at an annual rate of 25%, you would be paying around $1,042 per month just in interest. By consolidating that debt into a HELOC at 8%, your monthly interest payments would drop to just over $333 – saving more than $700 every month.
Keep in mind, however, that consolidating credit card debt into a HELOC means trading unsecured debt for debt secured by your home; therefore, ensure you have a practical repayment plan in place before making your decision.
Covering Education Expenses
Because HELOCs let you access your equity over time, they can be a great way to pay for ongoing education expenses – including tuition, books, supplies, and even housing/living costs – for you or a loved one.
Although student loans – especially federal Direct Loans – may be preferable in many cases, a HELOC can help cover tuition gaps or other expenses not covered by student loan financing.
Serving as an Emergency Fund
Some homeowners take out a HELOC with no immediate plans to use it. Instead, they simply choose to have access to their equity as an emergency fund, in case the need arises in the future.
This could be for sudden obligations, such as unexpected car or home repairs, or for covering day-to-day expenses if they were to lose their job, need to take time off due to illness, or otherwise see a temporary decrease in their income.
Starting a Business
Because it comes with a revolving line of credit, a HELOC can be a practical source of seed funding to launch a new business and cover the costs as you get it off the ground. It can also be used to temporarily float expenses or expand operations in an existing business venture.
However, before going this route, be sure to fully understand the risks of putting your home on the line and make sure you have a plan to repay your HELOC in the event your business doesn’t turn a profit as quickly as you anticipate.
Check out our full guide to using home equity to start a business to learn more.
Purchasing Investment Properties
Some borrowers leverage their existing home equity to grow their real estate portfolio through the purchase of long-term rental or fix-and-flip properties. Investors often use their HELOC to make a down payment on a new property, but if you have enough available equity, you may even choose to use your line of credit to cover the full purchase price and any needed repairs.
The best part – especially for fix-and-flip investors – is that your line of credit can be used as many times as needed throughout the draw period. This means that you could purchase a home and fund renovations with your HELOC, then pay off the balance when you sell the property, allowing you to access the line of credit again.
When Not to Use a HELOC
While a HELOC can be a flexible tool, it also carries risks. Payments can rise if interest rates increase, overspending can leave you with more debt than you planned, and using your home as collateral means that missed payments put your property at risk. With those drawbacks in mind, here are some situations where a HELOC usually isn’t the right choice:
Short-Term or Lifestyle Spending
Using a HELOC for vacations, cars, or other short-lived purchases is risky—you’re trading temporary enjoyment for long-term debt secured by your home. Having debt secured by your home means that you could lose your home if you don’t repay it.
If Your Home’s Value Might Decline
Many real estate markets all across the country are currently experiencing volatility in home prices, with property values dropping for the first time in years.
If you are in an area where values are in decline or may decline in the near future, using a high-LTV HELOC to access a significant portion of your equity could leave you underwater on your home, owing more on your mortgages than the property’s worth.
If You Can’t Manage an Adjustable Rate
Fixed-rate mortgages have steady and consistent monthly payments throughout the entire loan term. Adjustable rates, on the other hand, fluctuate regularly, meaning that if rates were to spike, you could see your payments jump significantly from one month to the next.
If you don’t have the leeway in your budget or the ability to manage these variable payments, you might want to consider a fixed-rate alternative, such as a home equity loan, instead.
If You’re Uncertain About Repayment
A HELOC can be an effective way to access cash when needed. However, you’ll still need to have a plan to make your interest payments during the draw period and be able to weather high monthly costs once the HELOC enters its repayment phase and the principal balance becomes due.
If you’re uncertain about how you’ll make your HELOC payments, you may want to look into other options, such as personal loans, that do not put your home at risk of foreclosure in the event you go into default.
If You’re Planning to Sell Soon
Although a HELOC can be a practical way to make improvements to your home to get it market-ready, some HELOCs have prepayment penalties for closing them within the first few years.
As such, if you’re planning to sell soon and use the proceeds to repay your loan balance, you may be better off seeking out a personal loan or credit card with a 0% introductory rate.
HELOC vs. Other Ways to Tap Home Equity
A HELOC isn’t your only option. Depending on your goals, another equity product may be a better fit:
- Home Equity Loan: Best for large, upfront expenses with a known price tag—like a major remodel, debt consolidation, or medical bill. Since it’s a lump sum with a fixed rate and consistent monthly payments, it’s easier to budget. It’s also a good choice if you want to keep your primary mortgage intact, especially if you already have a low rate. See our full guide to HELOCs vs. Home Equity Loans here.
- Cash-Out Refinance: Best if you want to replace your current mortgage and tap equity at the same time. This option can make sense when today’s mortgage rates are lower than (or close to) your existing rate. But if you’re sitting on a much lower rate, refinancing into a higher one just to pull equity out may cost more in the long run. See our full guide to HELOCs vs. Cash-Out Refinances here.
- HELOC: Best for ongoing or unpredictable costs—phased renovations, semester-by-semester tuition, or medical bills that unfold over time. You borrow only what you need, when you need it.
What Would You Use Your HELOC For?
While HELOCs provide you with the flexibility to use the funds however you choose, they are best used for purposes that will improve your overall financial situation.
This can commonly involve saving money by consolidating high-interest debts or making value-adding improvements to your home, but could also include long-term investments such as starting a business or building your real estate portfolio.
If you’re interested in seeing how you can leverage your home’s equity with a HELOC and find out how large a line of credit you can qualify for, apply with Refi.com today.
