11 Ways A HELOC Can Drastically Change Your Finances

11 Reasons A HELOC Could Change Your Financial Trajectory

Have you ever heard the old saying, “My house was my best investment!” I’ve never understood it until recently. You see, most folks pay down a mortgage over 30 years. In that time, they pay about as much in interest as the house itself, if not more. That is if they aren’t being suckered into refinancing every 5 years.

Now, do you want to learn WHY your home could actually be the best investment you currently own? In the following article I’m going to talk to you about some nifty ways that a HELOC has allowed us to pay down our mortgage FASTER, opened up access for investment opportunities, and gave us quick access to a substantial emergency fund.

We are also going to discuss 11 reasons that it could help to dramatically change your financial trajectory. What you are about to learn is for people who are good with money. If you’re a spender who has a difficult time reigning in those shopping habits, this could do more harm than good. Are you ready to get started?

What is a HELOC?

So, what is a HELOC? HELOC is a term that is short for Home Equity Line of Credit (HELOC) and can be used as either a 1^st lien (meaning that a bank holds the first position on a title) or a 2^nd lien (meaning that the bank is in the second position).

A HELOC is basically a credit card attached to your mortgage. The nice thing about it being attached to the mortgage is that it is considered a secured account and tends to come with far more flexibility and a lower interest rate.

So, how did it help my husband and I crush debt, pay off the mortgage faster and give us access to substantial cash? Well, let me explain!

We had a lot of smaller and larger debts out there that added up. The credit cards were on a ‘no-interest for x number of months’ type of plan.

We owed a whopping $604,000 in outstanding debt (including our home loan/traditional mortgage) with a total payment of $5262.19. In the chart below, I broke down the payment versus the principal and interest for each account.

The house we owned was worth about $550,000, which means at a 90% loan to value (LTV) we would qualify for right around a $500,000 loan amount. This would allow us to wrap in all of the other outstanding debt except my husband’s student loan.

We were able to stow away about $10,000 per month to pay down debt, but much of it was going towards unnecessary things, like Starbucks coffee trips, or eating out at restaurants that weren’t even great.

If we were to keep our 30 year mortgage, we would break the 400k barrier by month 21, nearly two full years from where we were. We also didn’t have actual access to the equity in the home and we were still paying roughly $961 a month in interest just on the mortgage.

By using the HELOC method and putting the full amount against the mortgage, we are able to get to under $400k by month 11. Also, we will have the house paid off in roughly 56 months at the current rate.

This also will open up cash to make purchases on new rental properties if an opportunity comes up that we would like to jump on, without having to sit on cash earning nothing. If we would have stuck with the 30 year mortgage, we would have paid nearly $200,000 in just interest. By using the HELOC strategy, we are expected to pay roughly $51,282.74 in interest, for a savings of nearly $150,000 and 25 years. Not only that, we managed to pay off all of the other debt at this point besides Mike’s student loans.

So, as you can see, a HELOC for the right person can be a dangerous tool to help you reach some amazing levels of financial freedom. And it has helped us tremendously!

So, what CAN you use a HELOC for to help level up your life? Well, here are the 11 strategies that will help you reach the next level of financial freedom and ‘put your greatest asset’ to work for you.

1. Home Improvement
2. Help with College Tuition
3. Built-In Emergency Fund
4. Long-Term Investments
5. Wedding Expenses
6. Business Expenses
7. Pay Down Debt
8. Pay off Medical Bills
9. Help Offset Long-term Care Costs
10. Help Protect you during Job Loss/Transition
11. Purchase 2^nd Home or Rental Property

Home Improvements

One of the best reasons to have a home equity line of credit is to turn the home into your dream house. By adding a home equity line, you can use those proceeds to make big repairs without eating into investment assets or having to come up with all of the cash up-front. The nice thing about home improvements is that they will typically add to your resale value as well.

Often, individuals use their line to renovate kitchens, bathrooms, or other projects around the house. According to HGTV.com https://www.hgtv.com/lifestyle/real-estate/top-home-updates-that-pay-off-pictures, some of the best home renovations you can do to increase your resale value are listed below.

• Landscaping
• Minor Kitchen Remodel
• Exterior Improvements
• Attic Bedroom Conversion
• Major Bathroom Remodel
• Major Kitchen Remodel

Each of these could not only improve the value you have in your home, but it could also give you access to a greater line of credit down the road. As always, use credit wisely.

Help with College Tuition

If you’ve ever wanted to pay for your child’s college education but you didn’t really know how to do it? This might be the option for you. Let’s face it, college tuition is out of hand. My husband and I both paid our own way through college. I never finished and my husband went on to grad school.

We were both left with some pretty hefty college debt that we’ve been paying on for over 20 years now. Many of us don’t want to have our children doing the same thing when they’re at an age where they’re struggling to just get a job.

With the HELOC, you really have two ways that you can capitalize on paying off the debt. In the first option, you can pay as you go, using the HELOC to cover the expenses. The second option is more of a reward-based approach.

In the second option, you can allow your student to take on the student loan debt for the four or so years they are attending school. When they graduate, you then take the line of credit and pay off the debt, leaving them debt-free. If you use a method similar to what we talked about in the beginning, you could hopefully pay down that debt quickly without having to use any sort of retirement funds in the process. Pretty cool, huh?

Built-In Emergency Fund

According to a study by bankrate.com fewer than 4 out of 10 American’s could cover the cost of a $1,000 emergency. That is pretty scary considering we have spent the better part of two years living in a pandemic across the globe.

When you tap into the equity of your home, you don’t have to use it. However, if a major event arose, it could potentially put you in a spot to feel safe and still sleep at night. Most financial advisors say that you should have anywhere from 3 to 6 months of bills saved up for these types of events. As you can see, that isn’t happening for the average person.

Now, since you’re reading my blog, I know you’re not average! But here are a few examples of how this saved our own family. I’m very grateful for the HELOC because of this.

Our furnace went out in the home we purchased a year ago. It is an older home here in Maine so we were expecting it. Where we ran into an issue is that our house also had no AC throughout it. We were able to use the HELOC to pay for new heat pumps put throughout the house, saving us the heating oil expense every month and giving us valuable AC.

While the expense was great, we learned that it would pay for itself in as little as two years. We wouldn’t have been able to do this without access to those funds or without dipping into our retirement.

Long-Term Investments

This is a tricky one. As with anything, there is risk. When you borrow money to invest, you’re taking a huge risk! With that said, if you come across an investment or something you really believe in, and you’re willing to take the risk to own it, this may be a good opportunity for you.

The reason that this is an issue is that you’re borrowing money for something that could lose value. So, not only could you lose the whole amount, you would also be paying interest on the money lost. The opposite could be true, however.

If you were to pick a solid long-term investment that outpaced the interest rate, you could take the proceeds and pay off the loan. The difference between the current value minute the original investment plus interest paid is your new profit. If the number is positive, you made a good move.

I really need to stress that while this is an option, you need to be really careful if you decide to do something like this.

Wedding Expenses

Weddings, just like student loans, seem to have gotten out of hand. With the average cost of a wedding at $19,000 based on a study found at Wedinsights. It is no surprise that between student loans and starting a family, this generation is swimming in debt.

If you’re one of the fortunate ones that own a home already, or if you’re the parent wanting to help your kids out on their wedding day, then a HELOC could help you do just that. See, with the flexibility to pay the loan off, it gives you the ability to hire the right photographer, purchase the perfect dress and secure the most picturesque place you’d want for your special day.

If you make use of the HELOC as a means to quickly pay down your debt, this is a much more efficient way to pay for things than high-interest credit cards, which most individuals use. Remember, while it is easy to borrow, the goal is to pay the interest off the borrowed portion off quickly.

Business Expenses

So, maybe you’re looking at stepping out on your own but you’re scared to not have a salary. Or maybe you have a great idea but it is going to take a good chunk of cash to get it started? A HELOC can be a great way to help you alleviate the fear of not knowing where your cash will come from.

You can use the line to help offset living expenses, purchase an existing business or use the cash to hire out the work you need done. It is also great to have access to a HELOC if you’re building a side hustle and you eventually want to turn it into a full time gig. Needless to say, for the first two years of owning your own business, it makes it pretty difficult to get a loan so this is one way to make sure you’re covered.

Pay Down Debt

This is by far the best thing you can do with a HELOC. If you play it right, you can absolutely crush your debt in half the time or less. In order to do this, it takes a high level of discipline and you definitely need to watch your spending. The longer you can go without dipping into the cash that goes againt your HELOC, the less interest you pay overall.

It may not seem like a lot to save $10 to $20 in a month. It is when you look at 10 to 20 years and the compounding effect that is generated by the constant paydown that you really see a huge difference. In this situation you can take a 30 year mortgage and get the whole debt freedom calculation to happen in less than 5 years. Don’t believe me? See how we are doing it above!

Pay Off Medical Bills

Medical Bills are a tricky thing. For smaller bills, you can often work with the Hospital and work out a payment plan with them. Medical bills also don’t typically affect your credit score due to some changes in the law. To learn more about credit when it comes to medical bills, check out this article from Experian.

That said, if you have a major medical situation come up and you need to pay a large out of pocket bill, this does make for a nice way to pay for the procedure without taking away from your retirement funds. Lets face it, major medical situations are scary. Many times, you want to be healthy and get things taken care of. Just like with every other situation we’ve already discussed, it helps to have a safety net already in place to take care of situations as they arise.

Help Off-set Long-term Care Costs

This hits pretty close to home. Mike has had two close family members who have had severe and sudden dementia onsets. His grandfather has been steady going down hill for the past 5 years and will likely need some form of assistance in the very near future.

It is his uncle that was a surprise. At 72  years old, he was diagnosed with dementia. In the course of a year, it was so bad that he was walking around outside with a knife with a fear that someone was trying to kill him. When his wife realized that she couldn’t help him and work to maintain the household, he had to get him in an assisted living facility.

These sorts of things aren’t cheap, especially when it is in a memory care facility. You could be looking at anywhere from $7,000 to $10,000 a month or more for the duration of their life! This has been known to wipe many families and the best way to protect against this is through long term care insurance.

If you don’t have long-term care insurance, the second best option to help with expenses is a HELOC. This way you can use a portion of the proceeds each month on a low interest payment while your assets remain in the market. You can hope to get ahead with investment arbitrage. What this basically means is that you hope to earn more interest with your invested assets than you pay on the loan.

This just gives you another option to pay such a hefty debt. When you’re looking at 5 to 7 years of life expectancy, that equates to $300,000 to $840,000 in care costs. Take care when you are spending such significant amounts of money and always be sure to work with your CPA and Financial Advisor to figure out the best path for you and your family.

Help Protect You During Job Loss or Job Transition

Let’s face it. There is nothing quite as scary as getting laid off or fired. If you live paycheck to paycheck like most Americans, nearly 40% to be exact based on a study by PYMNTS.com, you know that it tends to be frightening.

A HELOC is a great way to keep yourself safe in such an environment. The goal here is that you create an instant and significant cushion that you can fall back on if you need immediate access to capital. You can also use your HELOC to make your monthly payments if you need to. This can help carry you through the scariest of times.

Purchase 2^nd Home or Rental Properties

This is honestly my favorite option on this entire list. Why? Because I love using money to make more money. We have a HELOC on both our main home as well as on our rental property. The reason for this is that if we come across another property that will cash flow positively, we have access to immediate capital to make an offer.

The same could work for a 2^nd home as well. One strategy we’ve used in the past was simple. We used our HELOC to purchase a new home with cash. When the property was secured, we then took out a traditional mortgage to pay off the line.

This strategy has helped us capture a few of our rentals without having to save up a huge 20% down payment each time and it offers us a bit of flexibility in getting it paid off.

You can also use this to buy that second home you want in the mountains or near a lake or the ocean. Since you have the line already, you can get that dream property and then when it isn’t in use, you have the ability to Air BNB it. This is a great strategy to help you quickly pay down the line and is part of an opportunity known as house hacking.

Wrap Up

So there it is! This is our story and also the 11 reasons why you should have a HELOC in place. Besides the fact that it works as an instant emergency fund, it will give you ample access to cash in the event a future opportunity presents itself.-

If you can implement any of these strategies, let me know with an email or in the comments below. I’m super excited to learn about your own success stories.