If you have a negative reaction to any form of debt, you are certainly not alone. And I would argue this automatic reaction is usually more favorable than the opposite inclination to take on debt at any price and in any situation (danger!)

However, there can be certain instances where debt is a useful tool to consider. I talked with clients in recent weeks about using a certain type of debt – home equity line of credit (HELOC for short) – for two unique purposes. Let’s take a look – but as always, debt is something to be carefully evaluated on a case by case basis, so be sure to consult with your advisors and/or do you homework before taking any action.

I wrote about HELOCs back in 2024 so if you want to revisit the basics of what they are and how they work, please see this post.

Here are the two conversations where HELOCs have come up (and ended up being useful tools) –

1.Back-up plan – I recently met with a young couple to do a financial plan/review. They had done a great job saving and had no balance left on their mortgage. While they had some emergency savings in place, there remained a potential that a large/unplanned expense could cause financial strain (such as a material home repair, medical expense due to high deductible plan, etc). We discussed putting a HELOC in place on their home. The purpose for the HELOC in their particular case is to give them access to funds in an emergency at a relatively affordable interest rate. While HELOCs still incur interest, the rate is far lower than that of a credit card or the penalty/tax consequence of accessing retirement savings.

2. Financing tool – Two other clients came to me with a similar request. They wanted to help their adult children with their first-time home purchase. As is often the case in today’s real estate markets, the transaction happened quickly and they needed access to cash in weeks (not months). While they both had considerable investments and savings to cover the gifts, one had only pre-tax retirement accounts and one had both pre-tax retirement accounts and taxable accounts with meaningful capital gains. For both of these clients, the interest they would pay on the HELOCs was far more favorable than the tax implications given their tax brackets. As a result, they both used HELOCs against their homes to access cash in a matter of days. Now that the gift transactions are completed, they can consider replacing the HELOC with a mortgage (if/when rates are more favorable for that debt instrument) and/or begin repaying it in a methodical manner that minimizes the resulting tax implications.

As you can see, in both of these examples, a HELOC was a valuable tool to be used either in the present day – or in some potential future event. Again – debt is debt and should never be taken lightly. But in some cases, it is a blessing not a curse.