Can I use a HELOC like a checking account?

Many homeowners turn to secured loans such as a Home Equity Line of Credit (HELOC) when it comes to paying for expensive home renovations and other real estate expenses. However, a little-known fact is that HELOCs can be used to pay other expenses as well. In fact, using a HELOC like a checking account is a strategy some homeowners are using to manage their finances. 

Let’s break down how this works and whether it’s a good fit for you or not. Here, we’re going to help you understand your HELOC better, and the different ways you could use it, one among which is as a checking account.

What exactly is a HELOC?

A HELOC works like a flexible credit line based on the equity you’ve built in your home. Instead of getting a lump sum like with a home equity loan, you get a credit limit that you can borrow from over a set period, usually 5 to 10 years. You only pay interest on what you use, much like a credit card. After the draw period, you’ll start paying back both the principal and interest. Since HELOCs come with variable interest rates, your payments can change month to month based on market rates. The repayment time depends on the loan’s terms, typically giving you anywhere from 5 to 20 years to pay it off.

What are the advantages of a HELOC?

• HELOCs are the ideal home improvement loan, especially if you have a substantial amount of equity in your home.
• The amount of interest charged on a HELOC, even though it is a variable income loan, is considerably lower than the interest charged on credit card transactions.
• Being able to withdraw money from the line of credit offered, and paying interest only on that amount offers you better control of your finances.
• The interest paid on HELOCs is often tax deductible, which means you can save money on your annual taxes. Be sure to enquire with a tax professional to figure out how it works for your unique situation.
• The use of HELOCs is not limited to home improvements and real estate expenses. You can actually use your HELOC to pay for a variety of expenses, from medical bills and student loans to vacations and even weddings. In fact, you can even use the funds from your HELOC to pay off the IRS and consolidate your debts.

What are the disadvantages of a HELOC?

• HELOCs are not ideal if you’ve just bought your home, or don’t yet have enough equity in it. There are, however, other home renovation financing options you could look at.
• HELOCs use your home as equity. If you default on your monthly payments, you could end up losing your home to foreclosure. As always, it is wise to exercise caution while borrowing money.
• To qualify for a HELOC, you need a lot more than just equity in your home. You will need a great credit score, a healthy debt-to-income ratio, proof of employment, and a lot more before approval.
• Keep in mind that HELOCs have variable interest rates. While it may make repaying the loan easier when the interest rates drop, be sure you can stick to your repayment schedule even when the rates rise.

Read more: HELOC amortization schedule

What are some smart ways to use a HELOC?

• Home renovations to boost property value with upgrades.
• Debt consolidation by paying off high-interest debt with a lower-rate HELOC.
• Access to flexible emergency funding for unexpected expenses.
• Cover tuition or school expenses with better repayment terms.
• Investment opportunities in real estate or business ventures.
• As a checking account for paying everyday bills. When you use HELOC, you can deposit your income to quickly pay down the mortgage balance and reduce interest over time.

How does using a HELOC as a checking account work?

The idea is simple. You take out a HELOC and use it to pay for regular expenses, then deposit your paycheck directly into the HELOC, paying down the balance. As you continue this cycle, you’re essentially using the HELOC to manage your cash flow, rather than a traditional checking account.

Financial experts claim that this method can help you pay down your mortgage faster. By using the HELOC to cover expenses, and then paying it off with your income, you can reduce the principal on your equity lines of credit, which can ultimately shorten the life of the loan.

Let’s assume you earn $5,000 a month, and your monthly expenditure, including paying back your HELOC is $4,000 every month. If you use your HELOC as a checking account and put $5,000, or your paycheck, into it every month, you have an extra $1,000 left at the end of every month being redirected towards paying off the HELOC.

That way, your HELOC gets paid off earlier than it normally would, and you also end up paying less interest over the life of the loan.

What are the perks of using your HELOC like a checking account?

One major advantage of using a HELOC like a checking account is flexibility. During the draw period, you can borrow as much as you need, up to your credit limit, and only pay interest on the amount you’ve used. Since HELOCs often have variable interest rates that are lower than credit card rates, it can be a cost-effective way to manage short-term expenses.

Another benefit? HELOCs offer a lower monthly payment than most home equity loans because you’re typically just paying interest during the draw period. This can give you breathing room in your budget while you tackle large expenses like home renovations or consolidating debt.

Are there any risks of using HELOC as a checking account?

Before you start using your HELOC like a checking account, there are a few risks to consider.

For one, most HELOCs have variable rates, meaning your interest rate can change over time. If rates go up, your payments could become more expensive, making it harder to manage your budget.

Also, your credit score plays a significant role in securing a HELOC with a low interest rate. If your score isn’t strong, you might end up with less favorable terms.

Plus, relying on a HELOC as your primary account could leave you vulnerable if something unexpected happens – like losing your job or facing a medical emergency. Since HELOCs are tied to your home, defaulting on payments could put your property at risk.

Lastly, keep in mind that while you’re using the HELOC, you’re still accumulating debt. You’ll need to have a solid plan for paying it off within the life of the loan. Otherwise, you may just end up extending the time it takes to pay off your existing mortgage.

Key takeaway

Using a HELOC like a checking account can be a powerful tool for those who are disciplined with their finances and comfortable with equity lines of credit. If you’re focused on paying down your mortgage faster and taking advantage of lower interest rates, this strategy might work for you. But it’s not without risks – especially if you’re unprepared for the impact of variable interest rates.

In any case, it’s essential to fully understand how a HELOC works, as well as your own financial habits, before diving in. In the end, whether you’re interested in home renovations or looking to manage your budget more effectively, a HELOC offers flexibility and a chance to tap into the equity in your home. Just make sure you’re comfortable with the responsibilities that come with it.

While loans such as HELOCs, second mortgages, cash-out refinancing, or even personal loans and credit cards may seem like the ideal way to deal with financial problems, it is worth remembering that the more debt you get into, the longer you are going to remain in debt. Therefore, it is wiser to spend within our means and have as little debt as possible. After all, we would not want to spend the rest of our adult lives only repaying loans, would we?

Written by Narayan Shrouthy. September 8, 2022

Narayan is a content writer for Kukun. With experience in both content writing and editing, Narayan mixes his writing and love for reading with his passion for music. As an active musician, He aims to be a key player in Kukun's content experience.