During times of persistent inflation and high interest rates, many adults look for any edge they can get. This can include cutting debt, refinancing student loans or shoring up their insurance protections. For homeowners, it can also mean leaning on their biggest financial investment: their house.
A home doesn’t just provide a roof and four walls. It can also be used as an additional source of income when needed. A cash-out refinance, for example, may be worth pursuing for owners who want cash quickly. Older homeowners may benefit from a reverse mortgage, while others turn to a home equity loan or a home equity line of credit (HELOC).
HELOCs will allow owners to cash out a portion of the equity they’ve built up in their homes. This form of credit works similarly to a credit card as owners will only borrow money when needed and they can repay it as they would other forms of credit. Like all financial products, however, the timing surrounding a HELOC is crucial in order to make it worthwhile. There are three times when it generally makes sense to act, which we will detail below.
If you think you could benefit from taking out a HELOC then start exploring your options here now.
The best times to get a HELOC
While a HELOC can be advantageous in multiple scenarios, here are three of the best times to get one.
When you need to pay off high-interest debt
If you’re currently bogged down with high-interest debt with no end in sight then consider paying it down – or pay it off in full – with a HELOC. Interest rates on credit cards are currently around 20% according to recent data from the Federal Reserve. Compare that to a HELOC with an Annual Percentage Rate (APR) somewhere between 7% to 11% (depending on your credit history and other factors) and you can quickly see why this form of credit is better to use.
Not sure what interest rate you would qualify for? Explore your HELOC options here now and find out!
When you need to make major household repairs
If you need to make a household repair and can afford to fund it with a tax refund or a reasonable withdrawal from your savings account then you can skip a HELOC. But if you need to make significant fixes or renovations that cost thousands (if not tens of thousands of dollars) then a HELOC is worth pursuing. Unlike other popular forms of credit, if you use a HELOC to fix up your home you may be eligible to deduct interest you paid come tax season.
“Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan,” the IRS explains. “The loan must be secured by the taxpayer’s main home or second home (qualified residence), and meet other requirements.”
When you have significant equity in your home
The more equity you have in your home the more you’ll be eligible to take for a HELOC. So if you can wait and put more money toward your mortgage you’ll put yourself in a better position than if you acted as soon as you hit the 15% to 20% threshold many lenders prefer you to be at. More money in your home is more money you can potentially withdraw at a lower interest rate. You’ll also have greater freedom to use the money for a variety of items versus being limited by a lower amount if you withdrew it sooner. This is especially beneficial for homeowners who have seen their home prices rise in recent years. Remember: Home equity is calculated by how much of your mortgage you’ve paid down and the value of your home at the time of application. So, if you’re living in a part of the country that has experienced a boost in home values, you may have a lot of money to work with.
The bottom line
A HELOC can be a cost-effective and smart alternative to traditional forms of credit. Instead of going the personal loan or credit card route, instead, turn to the home you’ve already invested your hard-earned money in. Just make sure to do it at the right time.
If you have high-interest debt you want to pay off, then consider taking out a HELOC. And if you need to make major home renovations a HELOC can help pay for them (and it may be tax deductible). Finally, if you can afford to do so, wait until you have significant equity in your home before accessing it. This will give you more money to utilize for a wider series of items and projects.
Ready to get started? You can easily explore your local HELOC options here now.
