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Home Equity Loans

Using a HELOC for a major purchase

Nov 06, 2024

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Written by

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Reviewed by

Key takeaways:

  • A HELOC could offer large loan amounts to help cover big expenses.

  • If approved, you can borrow as often as you need to, up to your credit limit.

  • The amount you could borrow is usually based on your home equity and your outstanding mortgage balance. 

Looking to pay for a big-ticket expense like a wedding, major medical procedure, or new kitchen appliances? If you’re a homeowner, you may be able to reach your goal by borrowing against your home equity, which is the amount you truly own on your home. It’s smart to research this option because a home equity line of credit (HELOC) often comes with an interest rate and monthly payment amount that could be lower compared to other kinds of loans.

If you’re unsure how much you need to borrow, that’s fine. A home equity line of credit, or HELOC, is a type of loan that allows you to borrow just what you need. In certain scenarios, a HELOC could be a smart move to get cash to cover your major purchases. 

Let’s look at how a HELOC works and why it could make sense to use one for big expenses. 

What is a major purchase loan?

A major purchase loan is an amount of money that you borrow for a transaction that’s typically far outside limits of your everyday budget. For instance, you may need a large amount of money to replace your HVAC system. 

Other types of major purchases you could use a home equity loan for include:

  • New appliances or electronics—upgrade your fridge, computer or entertainment system 

  • Old or worn furniture, rugs and other home furnishings

  • Medical expenses like surgeries that may have resulted in big bills

  • Elective medical procedures that may not be covered by your healthcare plan

  • Family planning and fertility treatments such as IVF

  • A large wedding, family reunion, or other major life event

How does a HELOC work?

A HELOC is a type of revolving debt, similar to a credit card. HELOCs are mortgages, and your home guarantees the loan. 

How a HELOC works is that the lender approves you for up to a certain loan limit and you could borrow up to that amount. It’s not a one-time loan. As long as you have available credit, you could borrow again. One way to free up available credit is by making payments against your balance.

To determine the amount you could borrow, lenders will look at two factors: your home equity and how much you still currently owe on your mortgage. 

Since a HELOC is a mortgage, it’s a second mortgage if you still have a balance on your first mortgage. Lenders will look at the amount you owe on your first mortgage and home value to figure your loan limit. You’ll only be able to borrow up to a certain percentage of your home’s value.

This limit is called CLTV or combined loan-to-value ratio. If the lender’s CLTV limit is 80%, then between your first mortgage and your new HELOC, you can only borrow 80% of your home’s value.

Let’s say your home is currently worth $500,000 and you still owe $150,000 on your first mortgage. With an 80% CLTV limit, your maximum HELOC loan limit would be $250,000.

$250,000 (HELOC) + $150,000 (mortgage balance) = $400,000 (80% of home’s current value)

If you qualify for this HELOC and you’re approved, you’ll start with a draw period. This is a few years when you can borrow, repay, and borrow more, up to your credit limit, as often as you like. The draw period is convenient because sometimes you don’t know much money you’ll ultimately need.

Some lenders may also require that you draw a minimum amount initially. 

Benefits of using a HELOC for major purchases

Two main benefits of using a home equity loan for a major purchase are:

  • Potentially bigger loan amounts compared to other options

  • Potentially lower interest rate compared to other options

HELOCs are secured loans. That means your home is collateral for the loan (if you don’t repay the loan, you could lose your home). Secured loans are a lower risk for the lender, so they often come at a lower rate for borrowers. 

HELOC vs personal loan for major purchases

An alternative to a HELOC is a personal loan. Understanding the in and outs of these two types of loans will help you figure out which one is your best choice. 

Interest rates

Personal loans and HELOCs may come with fixed interest rates, which stay the same, or they might have variable interest rates, which could go up or down. The rate you qualify for will depend on different factors like your credit profile and any collateral you offer. 

Flexibility

HELOCs let you borrow again and again up to your loan limit during the draw period. With personal loans, you borrow one lump sum one time. 

Collateral

With a HELOC, your home is collateral—your promise you’ll pay back your loan. Personal loans may not require collateral if you qualify based on your credit standing and financial profile. 

Approval process

Both personal loans and HELOCs require you to go through an application process. With personal loans, most lenders look at information like your credit history, income, and any current debts you owe. With a HELOC, a lender will consider your home value (some may ask for a home appraisal) in addition to your credit history and financial situation. 

What's next

  • Estimate your home equity. Knowing how much home equity you may have will help you to determine whether you have enough to qualify for a HELOC. A real estate website could give you a ballpark of your home’s value. Compare that to the balance you owe on your mortgage.

  • Check your rate. Talk to a lender who will do a soft check on your credit and let you know what rate you might qualify for. That will help you figure out how the loan could fit into your budget. 

Author Information

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Written by

Sarah is a contributing writer for Achieve. She is a financial counselor accredited by the Association for Financial Counseling & Planning Education®, and a writer for other Fortune 500 publications.

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Reviewed by

Jill is a personal finance editor at Achieve. For more than 10 years, she has been writing and editing helpful content on everything that touches a person’s finances, from Medicare to retirement plan rollovers to creating a spending budget.

Frequently asked questions

You could use a HELOC for most purposes, including major purchases, home improvements, or consolidating your higher-interest debts. Check with your lender to find out if there are any possible restrictions. 

Your monthly payment will depend on several factors like your loan term, the amount you borrow, and the interest rate. 

If you get a $100,000 20-year HELOC with a 12.75% interest rate, and you borrow the full $100,000, your monthly principal and interest payment would be approximately $1,154.

This example is for informational purposes only. Interest rates and payments are for illustrative purposes only. Individual results vary.

Sure, you could use a HELOC to pay off your credit cards, and potentially clear those debts faster than by making minimum payments. Before you sign on the dotted line, talk to a debt expert about whether this will support your goal in bettering your financial health. 

For example, can you qualify for a HELOC rate that’s much lower than the rate on your credit cards? Are you at risk of running up more debt after you consolidate your credit card debt? Working through a solid plan helps you to figure out how you can keep on top of payments.

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Home Equity loans are available through our affiliate Achieve Loans (NMLS ID #1810501), Equal Housing Lender. All loan requests are subject to eligibility requirements, application review, loan amount, loan term, and lender approval. Product terms are subject to change at any time. Offers are a line of credit. Loans are not available to residents of all states and available loan terms/fees may vary by state where offered. Line amounts are between $15,000 and $300,000 and are assigned based on product type, debt-to-income ratio, and combined loan-to-value ratio. Minimum 640 credit score applies for debt consolidation requests, minimum 700 applies for cash out requests. Other terms, conditions and restrictions apply. Fixed rate APRs range from 8.75% - 15.00% and are assigned based on underwriting requirements; offer APRs include a .50% discount for automatic payment enrollment (autopay enrollment is not a condition of loan approval). Example: average HELOC is $57,150 with an APR of 12.75% and estimated monthly payment of $951 for a 15-year loan. 10, 15, 20, and 30-year terms available (20 and 30 year terms only available for cash out requests). All terms have a 5-year draw period with the remaining term being a no draw period. Payments are fully amortized during each period and determined on the outstanding principal balance each month. Closing fees range from $750 to $6,685, depending on line amount and state law requirements and typically include origination (3.5% of line amount) and underwriting ($725) fees if allowed by law. Property must be owner-occupied and combined loan-to-value ratio may not exceed 80%, including the new loan request. Property insurance is required and flood insurance may be required if the subject property is located in a flood zone. You must pledge your home as collateral. Contact Achieve Loans for further details. Monthly savings claim is based on average monthly debt savings from originated loans for 2023. Monthly savings varies based on each loan situation and can be more or less than $800.

Affiliated Business Arrangement Disclosure: Achieve.com (NMLS #138464) and Achieve Loans are both wholly owned subsidiaries of Achieve Company. Because of this relationship, your referral to Achieve Loans may provide Achieve.com a financial or other benefit. Where permitted by applicable state law, Achieve Loans charges: 1) an origination fee of 3.50%, and 2) an underwriting fee of $725. You are NOT required to use Achieve Loans for a home equity line of credit. Please click here for the full Affiliated Business Arrangement disclosure form.

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