When inflation first started to pick up, it was an annoyance. Prices were rising on groceries, and dining out became a luxury. Fast forward a year, and prices are up on just about everything, including utilities, gas, and even car insurance. Inflation is wearing people financially thin.

Trying to free up money is challenging because even cutting costs, like your Netflix subscription, will do little against the hundreds more you’re spending on monthly bills. As a result, many people rely on credit cards or, worse, pull from their retirement accounts.

The effects of inflation can be detrimental to your budget. However, there is a way to make ends meet without draining your savings or incurring high-interest debt. It’s called a HELOC.

What is a HELOC?
HELOC stands for Home Equity Line of Credit. Like a traditional home equity loan, a HELOC allows you to borrow money against the value of your home. 

Home Equity = Value of Home – Amount Owed

For example, if your home appraises for $300,000 and you still owe $100,000 on your mortgage, your home’s equity would be $200,000 ($300,000 - $100,000). You can borrow a portion of this equity through a HELOC.

While a traditional home equity loan provides the borrowed funds upfront, a HELOC offers much greater flexibility.

• Approved Limit: Once approved for a HELOC, you are given a maximum amount you can borrow. You can withdraw these funds at once or as you need them.
• Revolving Credit: HELOCs function like credit cards. If you have a $50,000 limit and withdraw $5,000, you’re required to begin payments on the $5,000. However, $45,000 is still available to withdraw. Once you repay the $5,000, the whole $50,000 will become available again.
• Lower Interest Rates: Because HELOCs use your home as collateral, the interest rates are significantly lower than unsecured loans, such as credit cards or personal loans.
• Repayment Terms: The loan terms on HELOCs are much longer than other loans. Typically, HELOC terms range between seven to ten years, but it’s not uncommon for some to extend up to 20 years. Longer terms help lower your monthly payments.

Ways to Use a HELOC to Fight Inflation:
While it might not be obvious at first, a HELOC’s flexibility and low cost can help homeowners battle the effects of inflation.

• Maintaining Retirement Accounts

As budgets wear thin, many people pull money from their retirement accounts to make ends meet. Others are limiting their monthly retirement contributions to free up funds. However, the effects of these actions can have serious consequences on your retirement.

- First, when pulling from a traditional 401(k) or IRA early, you’ll likely incur a 10% penalty. You’ll also be required to pay taxes on these funds.

- Second, it’s impossible to make up lost time on your retirement accounts – and the potential tax savings.

Using a low-cost HELOC to help keep your budget afloat until inflation cools is worth considering. You’ll avoid damaging your retirement plan, and the lower rates and longer terms of HELOCs make repaying the borrowed funds manageable.

• Consolidating High-Interest Debt

Trimming expenses from your budget to make room for higher prices is a great starting point. But sometimes, it doesn’t get you as far as you hoped. One way to free up significant funds is to consolidate high-interest debt with a HELOC.

Debt consolidation is a simple process that involves moving high-interest debt, such as credit cards, to a lower-rate loan. Consider the following example:

Imagine you have three credit cards with varying balances and interest rates:

Your total outstanding balance is $7,250. Instead of managing three credit card payments and high-interest rates, you can consolidate all these cards into a HELOC at a much lower interest rate of 7.5% APR.

Depending on your outstanding balances, you could free up hundreds of dollars over the course of a year with this strategy.

• Covering Unplanned Expenses

When money is already tight, nothing causes more fiscal stress than unexpected expenses. Getting caught off guard can be financially defeating, whether it’s medical expenses, home repairs, or sudden spikes in monthly bills.

One of the greatest perks of a HELOC is that it’s always available. Most HELOCs have a 10-year draw period, meaning the money is there for ten years should you need it. If you never use the money, it doesn’t cost you anything. You only pay interest when you withdraw funds.

Having a financial lifeline in your back pocket is a great feeling and can alleviate future financial stress. 

A Word of Caution
A HELOC is a powerful financial tool for homeowners. However, home equity loans use your house as collateral. That means you want to refrain from using these funds recklessly. Having a $50,000 lifeline available doesn’t translate into a spending spree or a trip to Maui. The last thing you want to do is risk your home over frivolous spending.
However, when used responsibly, a HELOC can provide relief from inflation and rising costs. Anytime you borrow against your home, it’s essential to create a plan to repay the funds quickly.

We’re Here to Help!
Economic fluctuations will impact your finances, whether it’s inflation or a recession. The best course of action is to maintain a well-funded emergency savings account to help weather the fiscal storm. However, if you’re struggling, there are solutions available.
If you’re interested in speaking with a member of our lending team about a HELOC, we’re always available. Please stop by the Credit Union or call 410-687-5240 today.

Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.

3/17/23