What Can You Use A Home Equity Loan For?

A home equity loan can be used for a variety of financial goals. Learn how to evaluate potential uses, expenses to think twice about, financing alternatives, and Texas-specific requirements.

Key Takeaways

• A home equity loan can help fund many major expenses. Home improvements, debt consolidation, education, and medical costs are some of the most common uses.
• Your home secures the loan. Make sure the monthly payment fits your budget before you borrow, because missed payments could put your home at risk.
• Planning ahead makes a difference. A detailed budget and a clear repayment plan can help you borrow with confidence.
• There are other financing options. Comparing a home equity loan with a HELOC, cash-out refinance, or personal loan can help you find the right fit.
• Texas has specific rules. State law generally limits the total amount you can borrow against your homestead to 80% of its value, among other requirements.

A kitchen that’s overdue for an update. A roof that can’t survive another storm season. A tuition bill that arrives sooner than expected. Big expenses have a way of showing up all at once, and not everyone has the cash on hand to cover them.

If you own your home, the equity you’ve built over time can become a valuable financial resource. But because your home serves as collateral, it’s important to think carefully about how you use those funds and whether the loan fits comfortably into your budget.

This guide answers the question, what can you use a home equity loan for? It’ll cover the most common uses, expenses you may want to think twice about, how a home equity loan compares with other financing options, and what Texas homeowners should know before borrowing.

What’s A Home Equity Loan?

A home equity loan lets you borrow against the equity you’ve built in your home. Your home equity is the difference between your home’s current value and the amount you still owe on your mortgage.

For example, if your home is worth $450,000 and you owe $250,000 on your mortgage, you have $200,000 in equity.

Home Value – Mortgage Balance = Home Equity

With a home equity loan, you receive the funds as a lump sum and repay it through regular monthly payments over a set repayment period. Home equity loans typically have a fixed interest rate, which can make your payments easier to predict. If you already have a mortgage, a home equity loan is generally a second mortgage – this means you’ll have an additional monthly payment alongside your existing mortgage.

Home Equity vs. Available Equity

Having equity doesn’t mean you can borrow all of it. In Texas, state law limits how much you can borrow against your homestead to 80% of its value.

Using the same $450,000 home and $250,000 mortgage from the example above, here’s how the 80% limit works:

Home Value × 80% – Mortgage Balance = Estimated Max Borrowing Amount

Even with $200,000 in equity, the most you could borrow in this example is about $110,000. Your actual amount may be lower because lenders also consider your credit history, income, and other debts when deciding how much you can borrow.

Can You Use A Home Equity For Anything?

In many cases, yes. Home equity loan funds can generally be used for a wide range of major expenses, but your lender may have specific requirements or restrictions. Before applying, make sure you understand the terms of the loan and any limitations that may apply.

With that flexibility, it’s important to consider not only whether you can use a home equity loan for an expense, but whether it’s a good fit for your financial situation. Because your home secures the loan, it’s worth weighing the benefit of the expense against the cost and risk of borrowing.

The sections below explore some common uses for a home equity loan, along with expenses you may want to think twice about financing with your home’s equity.

What Are The Best Uses For A Home Equity Loan?

There’s no single use that’s right for every homeowner. However, some expenses may provide benefits that last longer than the repayment period, while others may simply fund a short-term expense.

Here are some common ways homeowners may use home equity:

Home Improvements & Renovations

Home improvements, renovations, and major repairs are some of the most popular reasons homeowners consider borrowing against their home’s equity. The lump sum a home equity loan provides can help cover the cost of a large project, especially when you have a good estimate of the total cost.

Depending on your needs, you might use the funds for:

• Kitchen or bathroom renovations
• Roof or foundation repairs
• HVAC replacement
• New windows or doors
• Accessibility improvements
• Outdoor improvements
• Energy-efficient upgrades

A large project can often cost more than you initially expected, so create a detailed budget before borrowing. Include materials, labor, permits, and other project expenses, while leaving room in your budget for the unexpected.

You may also want to think about whether the project could increase the value of your home and how long you’ll benefit from the improvement compared with how long you’ll be making loan payments. Consider whether those potential benefits justify taking on additional debt.

Debt Consolidation

A home equity loan can be used to consolidate multiple debts into one loan. For example, you could use the proceeds to pay off credit cards, personal loans, medical debt, or other high-interest balances.

Combining these balances may simplify your payments and, depending on the interest rates and terms of your existing debt, could reduce the amount of interest you pay. But there’s an important tradeoff: you’d be replacing unsecured debt with debt secured by your home.

If you use a home equity loan to consolidate debt, you’ll want to have a plan for managing your budget and avoiding new debt once the old ones have been paid off.

Paying For Education

Whether you’re covering tuition, graduate school, professional certifications, or career training, a home equity loan can help. Before borrowing, compare it with federal student loans, Parent PLUS loans, and private student loans.

These options can have different rates, repayment terms, and eligibility requirements. Federal loans offer borrower protections that a home equity loan doesn’t, such as income-driven repayment plans and options to pause payments in certain situations.

The right choice will depend on your circumstances and the total cost of each option.

Covering Medical Expenses

Large, unexpected medical expenses can put significant pressure on a household budget. Depending on the situation, homeowners may use a home equity loan to help cover surgeries, long-term treatment, dental care, medical equipment, and any other significant out-of-pocket expenses.

It may be a better alternative to putting these types of expenses on a high-interest credit card. Before moving forward, contact your medical provider about payment plans or financial assistance. If you do borrow, it’s important to compare the total cost of borrowing and make sure the payment fits your budget.

Starting Or Expanding A Business

Some homeowners use a home equity loan to start a business or help an existing one grow. The funds may go toward startup costs, equipment, inventory, marketing, a workspace build-out, or working capital.

A clear breakdown of your one-time and ongoing business expenses can help you determine how much funding you need. For example, a startup may need funds for equipment, inventory, and initial marketing, while an established business may need capital for expansion, additional employees, or new technology.

Purchasing An Investment Property

A home equity loan may also be used to help purchase an investment property, including a down payment or renovations.

When evaluating an investment property, look beyond the purchase price. Estimate potential rental income and account for the property’s mortgage, property taxes, insurance, maintenance, and other ongoing expenses. You’ll also want to factor in periods of vacancy and the possibility of unforeseen repairs when estimating your cash flow.

Rental income can vary from month to month, and property values can change over time, so account for fluctuations in both when evaluating the investment.

Financing Major Purchases Or Life Events

For some homeowners, a home equity loan can provide a way to finance larger purchases or life events.

Depending on your needs, this could include:

• A wedding
• Fertility or adoption costs
• Replacement furniture or other needed household items
• Funeral or burial services

For these types of expenses, careful budgeting is especially important. Consider the total cost of the purchase or event and how long you’ll be making loan payments after the expense has passed.

A detailed budget can help you account for the full cost, including related expenses that may not be part of the initial estimate, giving you a better idea of how much you’ll need to borrow.

What Should You Avoid Using A Home Equity Loan For?

Because a home equity loan can provide access to a relatively large amount of money, it can be tempting to use the funds for almost anything. But some purchases and expenses may not provide enough lasting value to make borrowing against your home worthwhile.

Vacations

While we all need to get away sometimes, financing a vacation with a home equity loan may not be the best idea. Using a long-term loan to finance a short-term experience means you’ll continue making payments long after the vacation is over.

Planning ahead and giving yourself enough time to save may be a better approach.

Everyday Living Expenses

Using home equity to cover recurring expenses such as groceries, utilities, or monthly bills may be a sign that your current budget needs a closer look.

A home equity loan provides a lump sum, but everyday expenses continue after that money is gone. If you’re regularly relying on borrowed money to cover basic expenses, adding another monthly payment may make the underlying problem harder to solve.

Luxury Purchases

Luxury purchases can be appealing, but they’re generally discretionary expenses that aren’t necessary to meet an immediate financial need – some may even lose value over time.

This could include purchases like:

• Fine jewelry
• Designer goods
• Upscale or collector vehicles
• Boats or powersport equipment
• State-of-the-art gadgets and technology

You’ll also want to remember that when you finance these types of purchases with a home equity loan, you’re paying not only for the purchase itself but also interest on the amount borrowed.

Speculative Investments

Using borrowed money to invest can increase both potential gains and potential losses. Speculative investments, such as cryptocurrency, day trading, or other high-risk investments that can experience highs and lows, come with a higher level of uncertainty than more traditional investments.

When you use a home equity loan to fund an investment, you’re still responsible for repaying the loan even if the investment loses value. That means you could end up owing more on the loan than the investment is worth, while also paying interest on the money you borrowed.

Before using your home’s equity for an investment, make sure you understand the risks and consider whether the potential benefit justifies taking on debt secured by your home.

Is A Home Equity Loan Better Than Other Financing Options?

A home equity loan is one of several ways to finance a major expense. The right option for you may depend on how much you need, when you need the funds, how you want to repay the money, and whether you’re comfortable using your home as collateral.

Home Equity Loan vs. HELOC

A home equity loan provides a lump sum upfront that you repay through regular payments over a set term. A Home Equity Line of Credit (HELOC) works more like a revolving line of credit, allowing you to borrow from an available credit limit as needed during the draw period.

A home equity loan may be a better fit when you know how much you need upfront. A HELOC may provide more flexibility when expenses will happen over time or the total amount you’ll need isn’t known yet.

Home Equity Loan vs. Personal Loan

A personal loan can also provide a lump sum with regular payments, but it’s typically unsecured. That means you don’t use your home as collateral.

A home equity loan may offer different rates or repayment terms, but it also puts your home behind the debt as collateral. Compare the total cost, monthly payment, loan term, and collateral requirements when evaluating the two options.

Home Equity Loan vs. Cash-Out Refinance

A cash-out refinance replaces your existing mortgage with a new mortgage for a larger amount, allowing you to receive some of your home’s equity as cash. Since you’re replacing your existing mortgage, the new loan’s interest rate, repayment term, and closing costs can affect your overall cost.

A home equity loan generally leaves your existing mortgage in place and adds another loan secured by the home.

If you’re happy with your current mortgage rate, keeping your existing mortgage may be an important factor when comparing these options. You’ll also want to consider the closing costs and terms associated with refinancing.

Home Equity Loan vs. Credit Card

Credit cards can be convenient and offer more flexibility for smaller purchases and short-term expenses, but because they typically have higher interest rates, paying off the balance quickly can help limit the amount of interest you pay.

A home equity loan may be a better fit when you need to finance a larger expense with a defined repayment schedule.

Here’s how these common financing options compare at a glance:

No single financing option is right for every situation. Comparing the loan amount, interest rate, fees, repayment period, monthly payment, and collateral requirements can help you understand the overall cost and tradeoffs of each option.

Texas Homeowners: What Makes Home Equity Loans Different?

Texas has specific constitutional requirements that apply to home equity loans secured by a homestead in their state. These rules affect how much you can borrow, how often you can take out a home equity loan, when you can close, and certain costs associated with the loan.

The 80% Limit

One of the most important rules is the 80% combined loan-to-value limit. The total principal balance of the home equity loan and other debts secured by the homestead can’t exceed 80% of the home’s fair market value when the loan is made.

The 80% limit is one of the ways Texas law is designed to protect homeowners, helping prevent them from over-borrowing against their homes and ensuring that a portion of the home’s value remains theirs.

One At A Time

Texas law allows only one home equity loan secured by your homestead at a time.

If your home secured a Texas home equity loan within the previous year, you’ll generally need to wait until one year has passed from the previous loan’s closing date before another home equity loan can close on the property.

However, there’s an exception when a state of emergency has been declared. In that situation, Texas law allows a homeowner to request an earlier closing by providing the required written oath.

A 12-Day Waiting Period

If you’re planning to use a home equity loan to cover an upcoming expense, timing matters. A Texas home equity loan can’t close until at least 12 days after you submit your application or receive the required notice, whichever is later.

You’ll also receive a final itemized disclosure of the fees, interest, costs, and charges associated with the loan before closing. If you need funds sooner than the required waiting period allows, another financing option may be worth exploring.

Limits On Certain Fees

Texas also limits certain fees charged on a home equity loan to 2% of the original principal amount. Some costs, such as appraisal, survey, and title-related fees, aren’t included in that calculation.

That means it’s still important to look at the total cost of the loan, rather than assuming the 2% limit covers every fee or closing cost.

Property Must Be Your Homestead

If you’re looking to borrow against an investment property or other non-homestead property, you’ll need to explore other types of financing that may be available from your lender. Texas constitutional home equity loans must be secured by the owner’s homestead.

Because these rules are specific to Texas, it’s important to work with a lender familiar with the state’s requirements and review the terms that apply to your situation.

The Bottom Line

A home equity loan can be a flexible way to access some of the value you’ve built in your home. It can help fund a renovation, consolidate debt, cover education or medical expenses, or pay for another major expense.

But flexibility doesn’t mean every use is equally suitable. Before borrowing, think about whether the expense supports your longer-term financial goals, compare the available financing options, and make sure the payment fits comfortably within your budget.

Most importantly, remember that you’re borrowing against your home. If you can’t repay the loan as agreed, you could put your home at risk.

If you’re considering using your home’s equity, A+FCU can help you compare your options and understand how a Home Equity Loan or HELOC could fit your financial goals.

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