The four best ways to use a home equity credit line (Thought Leaders)

Summer is a popular season for home improvement projects, and many Northern Nevadans are planning to remodel or renovate their homes this year. One way to finance this type of expense is with a Home Equity Credit Line (HECL), sometimes referred to as a Home Equity Line of Credit (HELOC). Homeowners in the Reno metro area are finding it easier to tap into their equity this year because of rising home values, which have increased 6.2 percent since 2018, according to Zillow.

An equity-based credit line offers several advantages over a personal loan or a second mortgage. It lets you borrow only what you need and make low interest-only payments on that amount, as opposed to taking out a loan and paying back the entire amount over time. HECLs have no origination fees, closing costs or third-party fees, and drawing from your credit line is as easy as writing a check or making an online transfer.

When does it make sense to tap into your home's equity?

“The answer depends on each individual's circumstances, since consumers should always focus on taking on debt responsibly,” said Craig Kirkland, Executive Vice President of Nevada State Bank.

According to Kirkland, a HECL may make sense in four specific situations:

1. Home improvements. Remodeling your kitchen or adding a deck can add to your home's value when it's time to sell. Even though you are borrowing against your home's equity, you're potentially increasing that equity as a result of the improvements. Other projects may help lower the cost of living in your home; for example, weatherproofing, installing solar power equipment or upgrading your HVAC system can make it cheaper to heat and cool your home, and re-landscaping with drought-tolerant plants can lower water bills.

2. Education expenses. Achieving a graduate degree or other educational certification may qualify you for a higher-paying job. However, paying for tuition and other related expenses can be a major financial headache in the short term. A home equity credit line can help reduce the burden of higher education costs, allowing you to make an investment in yourself and increase your long-term earning power.

3. Debt consolidation. Because HECLs use your home equity as collateral, they generally offer lower interest rates than many non-collateralized loans. “Drawing on your HECL to pay off high-interest debt such as credit cards can make sense in certain situations, as long as you remain disciplined about not taking on additional high-interest debt in the future,” said Kirkland.

4. Essential large purchases. A HECL can be a convenient and relatively low-cost way to pay for big-ticket items such as a new refrigerator or washing machine, or an unexpected major car repair. However, Kirkland advised that HECLs should not be used for everyday expenses, since any HECL withdrawal is reducing the equity in your home.

As with any loan, borrowers should do their homework before signing on the dotted (or digital) line. “Be sure to ask if there will be any appraisal or loan fees,” Kirkland advised. “If the interest rate is variable, is there an option to lock in an interest rate over a longer period of time? Ask about options for repayment. Some credit line programs will be interest only, while others will have a principal-and-interest option allowing you to reduce principal with each payment as long as no additional draws on the principal are made. It may also be wise to consult a tax expert to determine whether the interest on your HECL is tax deductible. Like any major financial decision, it's smart to weigh the pros and cons and make an educated decision after discussing it with financial professionals.”

This article was provided to the NNBV by Nevada State Bank, which sponsors this content.