What can a home equity loan be used for? 4 top options

Sitting on some serious home equity but facing a major expense? Whether you're dreaming of a kitchen renovation, getting ready for college tuition bills, or dealing with unexpected medical costs, a home equity loan might be the financial tool you're looking for.

But what can a home equity loan be used for? Explore the most common uses for these flexible financial products.

What is home equity?

Home equity is the part of your home you own outright. Equity grows in two ways: as you pay down your mortgage balance and when your property increases in value over time.

You can calculate your equity by taking your home's current value and subtracting what you still owe on your mortgage. For example, if your home is worth $350,000 today and you still owe $225,000 on your mortgage, you have $125,000 in equity. That money is yours, just tied up in your property — but there are ways to take a loan against your house without having to sell it.

So, what is an equity loan, and how does it work? Here are the most common options:

Home equity loan: Get a lump sum of cash upfront with a fixed interest rate. You make regular monthly payments over a set period, typically 5-30 years.

Home equity line of credit (HELOC): Access a revolving line of credit you can draw from as needed. You only pay interest on the amount you use, which is great for projects with costs you can't predict in advance. 

Cash-out refinance: Replace your existing mortgage with a more valuable one and get the difference in cash. This can make sense if current interest rates are lower than your original mortgage.

Better makes tapping into your equity incredibly easy with a simple, digital-first HELOCs and home equity options. You can check your eligibility in just 3 minutes and access between $50,000 and $500,000 without leaving your couch — with cash in hand in as little as 7 days.

....in as little as 3 minutes – no credit impact

What can a home equity loan be used for? 4 options

What are home equity loans good for, exactly? There's a wide variety of use cases, but a few options stand out as the most popular. 

Here's how to use a home equity loan effectively:

1. Home improvements

One of the most common uses for home equity loans is funding renovation projects. From updating an outdated kitchen to adding a new bathroom or finishing a basement, these improvements can increase your home's market value while making it more comfortable to live in.

What makes home improvements an especially smart use of home equity is the potential tax benefit. If you use the funds to "buy, build, or substantially improve" the home you're putting up as collateral, the interest you pay may be tax-deductible. This essentially gives you a discount on your renovation project that you wouldn't get with other types of loans.

2. Debt consolidation

If you're juggling multiple high-interest debts like credit cards, a home equity loan could save you thousands of dollars. By paying off those high-interest balances with your home equity loan, you could:

— Lower your overall interest rate
— Combine multiple payments into one manageable monthly bill
— Create a clear payoff timeline with a fixed end date

Keep in mind that you're converting unsecured debt into debt secured by your home. This option only makes sense if you know you can stay on top of your new loan payments.

3. Unexpected medical bills

Medical emergencies can strike without warning, leaving families with bills that insurance doesn't fully cover. When faced with significant healthcare costs, a home equity loan can help you pay for them at a reasonable interest rate.

The predictable payment schedule of a home equity loan also helps you budget more effectively during a stressful time. Lower monthly payments compared to other financing options can give you some breathing room while you recover or care for a family member.

4. College tuition

The price of higher education isn't cheap, so it's not surprising that some parents and students are looking for alternatives to traditional student loans. A home equity loan can offer more favorable interest rates compared to some student loan options, especially private ones.

If your home equity loan rate is lower than available student loan rates, you could save money over the life of the loan. Plus, you won't have to navigate the world of student loan repayment programs and deferment options, which can be confusing.

....in as little as 3 minutes – no credit impact

What shouldn’t you use a home equity loan for?

Home equity loans have a lot of practical uses, but can you use a home equity loan for anything? Technically, the answer is yes, but they're not ideal for every expense. Here are some uses to avoid:

Expenses that won't pay you back

Using home equity to finance expenses like cars, vacations, or weddings is usually not a good idea. These purchases either lose value immediately or provide only temporary enjoyment, while you'll be paying for them — with interest — for years.

Everyday expenses

When you're using home equity to cover groceries, utility bills, or other routine costs, it might be a sign of deeper financial issues. This pattern can create a debt spiral that's difficult to get out of. Home equity loans should address specific needs, not patch over budget shortfalls month after month.

Uncertain investments

What happens when you use home equity to make risky bets? You might not be able to pay your loan back at all, which could mean losing your house.

The stock market, cryptocurrency, or a friend's business venture might seem promising, but they're rarely worth risking your home for. The potential returns would need to significantly outpace your loan's interest rate to make financial sense. Even then, market volatility could leave you owing money on an investment that's lost value.

Home equity loan pros

Before deciding if a home equity loan is right for you, consider these key advantages that make them so appealing to many homeowners:

Consistent monthly payments: Your payment amount never changes throughout the loan term, making budgeting straightforward for years to come.

Upfront funding: You receive the entire loan amount at closing, giving you immediate access to all the money you need for your project.

Fixed interest rates: Unlike credit cards or variable-rate loans, your interest rate stays locked in, protecting you from market fluctuations and potential payment increases. Even if rates are raised significantly after you sign the paperwork, your rate and payment remain unchanged.

Lower rates than unsecured debt: Because your home secures the loan, lenders take on less risk and typically offer much lower interest rates than you'd find with credit cards or personal loans.

Tax advantages for certain uses: If you use your home equity loan for substantial home improvements, the interest you pay may be tax-deductible. This potential tax benefit essentially discounts your effective borrowing cost compared to other loan types where interest isn't deductible.

Home equity loan cons

While home equity loans offer many benefits, they also come with some important limitations to watch out for.

Equity threshold: Most lenders require you to maintain at least 15-20% equity in your home after taking the loan, limiting how much you can borrow. If you've only recently purchased your home or if property values have declined in your area, you might not qualify for the amount you need.

Upfront expenses: Appraisal fees, origination charges, and other closing costs can add about 2-5% of your loan amount. On a $100,000 loan, that could mean $2,000-$5,000 in fees before you receive any funds, making smaller loan amounts potentially less cost-effective.

Your home is on the line: Unlike credit cards or personal loans, falling behind on home equity loan payments puts your house at risk of foreclosure. This makes it crucial to have a solid repayment plan and emergency fund before accessing your equity, no matter how worthy the expense might seem.

Turn your home equity into cash with Better

Your home's equity can fund life's big moments, from major renovations to college tuition. Using it is like putting your home to work instead of just watching your equity sit idly by.

Better's straightforward approach to home equity loans and HELOCs means you can check your eligibility in minutes and access your funds in as little as a week — with no hidden fees. See how much of your $50,000-$500,000 in equity you can tap into today.

....in as little as 3 minutes – no credit impact