If you own your home, you will like continue to enjoy rising home values in 2020. With higher home prices and rock bottom low interest rates, a good option for many home owners today is to open a home equity line of credit.
In the past you could deduct the interest paid on a HELOC loan up to $100,000, but as of January 1, 2018 you can no longer receive that benefit. The HELOC interest deduction will return in 2026 unless Congress passes a bill between now and then.
HELOC loans are variable interest credit lines that uses some of your home equity to pay for things you want or need. Home equity lines can get a good financial move for people who are OK with variable rate interest payments. It also can be a good idea if you have smart uses for the money. Not everything should be paid for with a HELOC. So, what are the best and smartest moves for writing checks with your HELOC loan? Here are five of them:
#1 Pay for Home Improvements Using a HELOC
One of the best things to do with a HELOC is to use the money to make yourself money. A common way to do this is to make home improvements. The theory is that if you use your equity to add value to your home, you can eventually make a nice profit when you sell the property.
But you have to be sure you are making improvements on your home that will add value. Some of the best home improvement ideas to make the most money include:
- Replacement of siding – costs approximately $8,000 on a typical home and can return 84% of cost.
- Minor kitchen upgrade – costs $18,000 or so and returns 81% of cost.
- Garage door replacement – costs $1000 and returns 80% of cost.
- Deck addition – costs $10,000 and returns 80% of cost.
As you can see, home improvements are expensive, but they are often worth it if they are done affordably. The key is to make improvements that the average person will find valuable. You always want to think about how the improvement will be viewed by a potential buyer. Most people like to see a new and upgraded kitchen; not as many people are going to be excited about a big pool in the back yard.
The quality of the remodel also matters. It is smart to have experienced contractors do your home improvements, unless you have the knowledge and skills to do them well yourself.
Also, be sure that you are not spending more on the improvement than makes sense. A $20,000 kitchen upgrade in a $200,000 home makes sense and will normally return a good ROI. A $100,000 kitchen upgrade in the same home may be nice for you, but it will never return anything close to what you put into the improvement.
#2 Pay for Investments with HELOC Loans
A great advantage of HELOC loans are the fact that it is a line of credit that is secured by your home. True, if you do not pay the loan, you can lose your home. But the plus side of this is that the loan is secured, so you get a very low interest rate – much lower than personal loans or credit cards.
With a low interest home equity line, a smart use of the funds can be to invest in real estate. If you are able to get a $50,000 HELOC loan with a 5% interest rate, you may be able to put that money into real estate investments and earn a 10% or 12% return. If you rent out a property that you purchase with that money and make a 10% return, you are making at least 5% on your money. Plus, that home in theory will appreciate over time.
#3 Finance College Education from a HELOC Loan
Are you considering going back to get your master’s degree? Going to grad school can be expensive; you may have to spend $50,000 or $100,000. But if you are getting a degree that allows you to earn substantially more money, this can be a good investment of your equity. Studies indicate that a typical master’s degree will allow you to make 15% more over your lifetime.
Some master’s degrees will give you even a bigger salary boost. If you are a nurse with a bachelor’s, a master’s degree to become a nurse practitioner can easily raise your salary by $30,000 per year. That adds up over time to hundreds of thousands of dollars in increased pay.
#4 Manage Cash Flow with a HELOC Loan
More people like to use their HELOC funds to give them more financial flexibility or to manage their finances more effectively. A HELOC will always have lower rates than credit cards. So, you can pay off credit cards with 18% interest and have only 5% or so interest on your loan.
This can be a logical financial move, as long as you are not tempted to run up the credit cards again. If so, using a HELOC loan to pay down debt can be a winner financially.
Getting a HELOC loan is a great way to get the money that you need to fund things that you want or need. The interest rate on an equity line of credit is low, but it can rise with time. Also keep in mind that after the draw period ends after 10 years, you have to start paying interest and principal. Most home equity credit lines have only interest payments at first. But if you have a smart use for the money that will ideally make you money or pay off high interest debt, a HELOC loan makes sense. Learn more about how a home equity credit line works and speak with home equity lenders that offer the credit that best suits your needs.
- HELOCs Can Hurt You. (n.d.). Retrieved from http://www.investopedia.com/articles/mortgages-real-estate/11/helocs-can-hurt-you.asp, 5 Effective Ways to use a HELOC. (n.d.). Retrieved from https://www.amegybank.com/resource-center/articles/5-effective-ways-to-use-a-heloc