Home equity is a powerful thing. And if you’re like many older homeowners, your home probably has plenty.
According to the National Association of Reverse Mortgage Lenders, homeowners aged 62 and older have about $13.2 trillion in home equity. Thanks to rising home values, they gained more than $328 billion in the first quarter of 2024 alone.
That equity comes with endless possibilities. You can cash in on it by selling your home, getting cash by refinancing, taking out a home equity loan, negotiating a reverse mortgage, or taking out a home equity line of credit (HELOC).
HELOCs are unique in that they allow you to access the equity in your home over a long period. Instead of being given a lump sum payment like other loans, you get a line of credit. This allows you to draw on that line of credit over future years.
Another distinguishing feature is that you can use the funds from a home equity line of credit (HELOC) for any purpose. Here are five ways you might want to spend the money:
1. To make your home more accessible
One way to use HELOC funds is to pay for upgrades to your home to make it more accessible. According to a 2023 Genworth survey of health care costs, the costs of nursing homes and assisted living facilities range from $25,000 to $117,000 per year, so many older adults are choosing to remain in their own homes.
However, this comes with its own set of challenges. For many older homeowners, ageing in place will require updating their property: adding more lighting for better visibility, widening doorways to accommodate walkers and wheelchairs, or installing grab bars or walk-in showers, to name just a few modifications.
“HELOCs are a good resource for making all kinds of home upgrades, such as accessibility upgrades,” says Kevin Leibowitz, a mortgage broker with Grayton Mortgage in Brooklyn, New York.
One advantage of using HELOC funds for affordability improvements is that you may qualify for a tax deduction. As long as you use the funds to “buy, build, or substantially improve” your home, you can deduct the interest you pay on a HELOC from your taxable income.
2. To repair or improve your home
You could also use funds from a home equity line of credit to cover other improvements and repairs to your home. For example, you could use the money to replace a damaged roof or fix a broken water heater. Home renovations can add value to your home, perhaps by adding a room or remodelling the kitchen. “Some homeowners also use a home equity line of credit to buy investment properties and remodel them for resale or long-term rentals,” says Mason Whitehead, branch manager at Churchill Mortgage in Dallas.
3. To pay off higher interest debts
You may also be able to use home equity lines of credit to pay off other debts. This often makes financial sense because HELOCs typically have lower rates than those offered on other financial products, particularly credit cards (the average credit card interest rate in May 2024 was 21.5%).
“HELOC interest rates are typically about half of those on credit cards,” says John Aguirre, a loan officer at Loantown in Del Mar, California.
Jon Hill, a 49-year-old wedding officiant at Dudeist Ministers in Cincinnati, knows this from first-hand experience. Two years ago, he took out a $70,000 home equity line of credit to help pay off his credit card debt. “During the pandemic, I was out of work, so I racked up a lot of debt,” Hill says. “[The home equity line of credit] paid that off.” Hill estimates the strategy saved him 15 to 20% in interest costs.
If you’re considering using a home equity line of credit to pay off high-interest credit card debt, make sure you have a plan to avoid racking up credit card debt again in the future. As Whitehead explains, “Remember, 90% of money management is behaviour.
If you have a history of running into credit card debt, then using a home equity line of credit (HELOC) to pay off that debt will likely just mean you’ll be back in credit card debt in a few years and have less equity and now a HELOC payment to balance as well.”
4. To cover medical debt
You may also want to use a HELOC to pay off existing medical debt you may have. Data released in 2022 by the KFF Health Policy Foundation shows that 37% of adults 65 and older in the country currently have or have had medical debt in the past five years. At the same time, the majority of respondents had less than $5,000 in debt, and more than 10% owed $10,000 or more.
Home equity lines of credit can often offer an affordable way to pay off these debts over time, especially compared to drug-specific credit cards. According to a 2023 report from the Consumer Financial Protection Bureau, these specialized cards are typically more expensive, with interest rates often exceeding 25%.
5. To provide a financial safety net
A home equity line of credit could also be helpful if you need to cover unexpected costs from an emergency, such as a car accident or sudden hospitalization.
The beauty of this strategy is that you won’t pay interest on the home equity line of credit until you actually draw down funds. This is different from a traditional loan, where you would start paying interest on the entire loan amount right away.
While reverse mortgages can also serve as a similar safety net, giving you access to regular funds over time, home equity lines of credit (HELOCs) are typically the more affordable option. “HELOCs can be a more cost-effective way to access equity compared to a reverse mortgage, as they typically involve significantly lower fees, often by a factor of at least five to one,” Aguirre says. “Reverse mortgages are much more expensive to obtain.”
Do the math
No matter what you use a home equity line of credit (HELOC) for, make sure you have a plan for paying it back, and take the time to do a cost-benefit analysis before moving forward. “You can use [a home equity line of credit] for a family vacation, but then you need to consider future payments and how long it will take you to pay it off,” says Whitehead. “The cost with interest over time can end up adding up to a lot of debt… [making] it not worth it.”
