Make the most of your home equity: 6 smart things to do with a Home Equity Line of Credit (HELOC)

Funding your goals and unlocking your best self, it all starts with a Citizens HELOC

1. Pay off your mortgage early

You may be asking yourself, should I pay off my mortgage by borrowing money? If you have built up equity in your home but still have a mortgage balance to pay off, you may consider using your HELOC to reduce your monthly payments and the overall interest you pay on your loan. Since HELOCs sometimes have lower interest rates than mortgages, you could save money and potentially pay off your mortgage early. Even if the rates are similar, refinancing your first mortgage with a HELOC might still be the best choice for you.

While the interest-only repayment option is an attractive feature of a HELOC, at the end of the draw period, the interest and principal will be rolled into one amortized monthly payment for a loan term of 15 years. You have to be prepared for this or the increase in your monthly payment could catch you by surprise and hurt your finances.

You could choose to make payments toward the principal each month to space these out. Since these are not automatically included in your monthly bills, you will need to let your lender know how much you want to apply to the principal. Look into your loan agreement to find out if there are any prepayment penalties. These usually apply only if you actively pay off and close your account. Generally, small monthly payments will not affect these penalties, but you'll want to be sure.

How to know if a HELOC is the best option

Using a HELOC to pay off your mortgage early is essentially a form of refinancing. It allows you to reduce your interest rate without the closing costs associated with a home refinance. Note that HELOC rates are variable, which means the rate can fluctuate up or down and is tied to a known index, usually the prime rate.

Before you decide, there are several factors to consider:

• Your current mortgage
• How much do you still owe?
• How long would it take you to pay it off?
• What are your monthly payments?
• What's your HELOC borrowing limit?
• What will your monthly payments be?
• Do you have the option to pay interest only?
• How long do you intend to make payments on your HELOC?
• Will you have the discipline to make additional payments towards the principal of your HELOC balance?
• Do you have any other borrowing options?
• What would your interest savings be under a typical refinance?

2. Home improvement

The most common uses for a home equity line of credit are the various ways you can put it right back into your home:

• Home remodeling
• Upgrades
• Preparing to sell

It's like using the home's value to increase its overall value by updating the kitchen with granite countertops, or increasing the overall square footage of a home by adding a second floor. Another way to use a home loan for remodeling is to pay for updates that may make your home sell faster or allow for a higher asking price.

Worth mentioning, interest paid on a HELOC may be tax deductible, if the funds are used to "buy, build, or substantially improve the taxpayer's home that secures the loan," in light of the Tax Cuts and Jobs Act (TCJA) of 2017. Talk to a tax advisor to learn more about deductions on interest.

3. Consolidate debt

It might be considered the least "fun" reason to open a home equity line of credit, but it's very practical and the second most popular use, according to a recent survey.

You can use a HELOC to help consolidate your debt as its likely your rate would be much lower. Where to start? Ask yourself "should I…"

• …pay off my mortgage early?
• …repay student loans?
• …make my credit card debt disappear?
• …deal with medical debt?

You might find that a HELOC can offer lower interest rates, streamline payments, and increase flexibility; it could also improve your credit score over time. Be sure to compare your options and talk to a professional to make sure you're making the right decision for your needs and situation.

4. Approaching or living in retirement

Whether you're approaching or already living in retirement, there are a few ways you can use your HELOC:

• Fund your cash flow.
• Cover downturns or take advantage of opportunities in the stock market.
• You could go back to school for a second act career, and pay for your education using the line of credit.
• If your physical needs change but you don't want to leave your home, you can use the HELOC to help pay for accessibility home renovation projects, such as a first-floor master suite or accessibility ramps.
• Use your HELOC for investment property, specifically a down payment on a property for rental, in order to generate additional retirement income.

5. Whatever comes up

Once you take out a home equity line of credit, you don't need to use it right away. When things come up in life, like the need to take time off work to care for a family member, you'll be ready to cover those costs with ease.

A HELOC can also provide peace of mind by knowing you have access to money you can use in the event of an emergency. Rather than tap into your savings or retirement fund, you can use the HELOC to cover a new roof after a storm or pay for a new car when your transmission dies unexpectedly.

Not every scenario needs to be a catastrophe: If you have the opportunity to get in on a great business idea, you can use a home equity line of credit to finance the new venture. Because a HELOC is so flexible, it can act as a financial security blanket and give you the peace of mind you require to take the next step.

6. Big ticket purchases

In life, there are some purchases for which it makes sense to charge them to a credit card or take out a personal loan. But when the price tag is higher, using part of your HELOC may be the logical move: maybe it's because the interest rate is better or you want more flexibility to pay it back. There are many scenarios in which this could come into play:

• The purchase a second home/summer house/vacation home
• Pay for a wedding
• Take a dream trip
• Invest in your children's education

HELOC provides flexible financial foresight

While we can't predict the future, we can plan for it. A HELOC can provide you with the financial flexibility for whatever comes your way. No matter the situation, you'll be prepared to take advantage of amazing opportunities, or protect yourself from the stress of daily life.

In order to unlock the power of financial flexibility you can get with a HELOC, first you need to open the line of credit. And remember, even if you open a HELOC and never use it, you won't have to pay anything back, just an annual fee for having the line of credit available for when you need it.

Ready to take the next step?

A HELOC from Citizens provides an easy and efficient approval process and two repayment options for maximum flexibility. Our home equity specialists provide support at every stage of the process.

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