If you’ve owned a home over the past several years, chances are you have a smile on your face. That’s because you’ve probably watched your home’s value go up and up (and up). This is where all that scrimping, saving, and stressing over the homebuying process really pays off.
However, you often don’t realize that “payoff” until you sell your home. Many homeowners overlook that their equity is growing all the time, whether because of market conditions or just making payments. The great news is that you can access the equity built up in your home, without selling it, by using a cash-out refinance, home equity loan, or home equity line of credit (HELOC). Learn more about the differences between them here.
That’s right—you can tap into the money you’ve paid into your home without selling or moving out. Stay put, continue living in the home you love, and continue (hopefully) watching your home’s value rise. And you can do all that with cash in your pocket!
What you do with that cash is up to you, but we have some suggestions. We can think of 10 great ways to use your home equity just off the top of our heads. They include, in no particular order…
1. Debt Consolidation
High-interest debt is no joke…and no fun. Of all the ways to use your home equity, paying down or consolidating credit card debt and other high-interest debt is one of the smartest.
A debt consolidation loan can help you lower your overall monthly payments by rolling your debts—including credit cards, student loans, medical bills, car payments, and other personal loans—into one monthly payment.
This payment typically comes with a substantially lower interest rate than your debts, and a lower overall monthly output both short- and long-term. You can use your home equity to pay off all or a lump sum of your balance. Curious about how it works? We break it down in our article.
2. Down Payment on Another Home
Building your empire, are you? Whether you’re just getting started or picking up another property to add to your portfolio, real estate investment is one of the most strategic ways to use your home equity.
Those funds can serve as a down payment on a second home, a vacation home, or an investment property. Before you know it, your equity could be paying off big-time in the form of home appreciation or supplemental rental income.
3. Funding Education
They say there’s no better investment than education. Unfortunately, the cost of a college education has skyrocketed over the past decade, and no one wants to get saddled with huge student loan payments. Paying for tuition and other education-related expenses is one of the great ways to use your home equity.
With interest rates typically lower than private student loans, tapping into your home’s value can provide the funds needed for higher education without the burdensome repayment terms that often come with traditional student loans.
4. Home Improvement
Reinvesting your home equity in your home can be smart. Home improvements, upgrades, and repairs can produce solid returns for your investment, but they require an extra chunk of change. Rather than charging home renovations to your credit card or opting for a personal loan, tap the equity you’ve already built.
You’ll want to use these funds wisely if you’re hoping an upgrade will boost your return on investment when it comes time to sell. So be sure to do your homework before jumping in.
Garage door replacement, kitchen remodels, and vinyl windows and siding are some of the renovations with the largest returns on investment. Want some numbers on the highest-ROI home improvements? Check out our article with some quick and easy information on the topic.
5. Other Investment Opportunities
Tapping into your home equity because you heard a “hot investment tip” on the street may not the smartest financial decision—but plenty of solid investments out there could be.
Whether funding your retirement account, pulling the trigger on a stock you’ve had your eye on, or establishing custodial accounts for your grandchildren, your home’s equity could yield big results when put to work elsewhere. Talking to your financial adviser or CPA first is always a good idea. While investing always comes with risk, many opportunities have made money for others, so why not you?
6. Creating an Emergency Fund
Life has a way of throwing curveballs, from sudden job loss to major appliance breakdowns. Setting up a home equity line of credit as a financial safety net can be prudent for homeowners. Unlike a traditional home equity loan that provides a lump sum, a home equity line allows you to borrow only what you need, when you need it.
A home equity line of credit (HELOC) works similarly to a credit card but has much lower interest rates. You’re approved for a certain credit limit based on your home’s value, and you can draw from those funds during a set period, typically 5 to 10 years. The beauty of a line of credit HELOC is that you pay interest only on the amount you use, not the total available credit.
This approach gives you peace of mind knowing that funds are available without the pressure of making monthly payments on money you haven’t used yet. Remember, your home secures this credit line, so it’s vital to use it responsibly.
7. Starting or Expanding a Business
Do you have entrepreneurial dreams? Your home equity might be the key to making them happen. Starting a business typically requires significant capital. And traditional business loans can be difficult to secure, especially for new ventures without a proven track record.
Using your home equity to fund a business venture can provide the necessary loan amount to get your dream off the ground with more favorable terms than many commercial loans. The long-term nature of home equity loans, typically 5 to 30 years, gives your business time to grow and generate revenue before you need to repay the full loan.
However, this strategy comes with clear risks. Business failures could jeopardize your home, so having a well-thought-out business plan with realistic projections is essential.
8. Managing Medical Expenses
Healthcare costs continue to rise, and medical bills can become overwhelming even with insurance. Getting a cash-out refinance of your existing mortgage or securing a home equity loan can provide much-needed relief when facing medical expenses.
Whether you’re dealing with unexpected surgeries, ongoing treatments, or specialized care not covered by insurance, home equity can provide the needed funds while offering monthly payments that fit your budget. This option is especially valuable for those facing high-deductible health plans or treatments not fully covered by insurance.
By consolidating medical bills through home equity, you may also benefit from tax advantages (consult your tax adviser). And you’ll appreciate the lower interest rates compared with medical credit cards or personal loans.
9. Funding Major Life Events
Life’s biggest moments often come with equally big price tags. Weddings, milestone anniversaries, bar and bat mitzvahs, or once-in-a-lifetime family reunions can strain your finances if you haven’t saved for them.
While a personal loan might seem obvious for these expenses, home equity typically offers more favorable terms. The repayment period for home equity loans tends to be longer than for personal loans, resulting in lower monthly obligations. This lets you celebrate those special moments without the stress of aggressive repayment schedules.
Just remember to borrow responsibly: While your daughter’s wedding is important, it might not justify borrowing against your home’s full equity.
10. Paying for Long-Term Care
Whether for yourself or aging parents, the costs of assisted living, nursing homes, or in-home care can be substantial. Using home equity can help cover these expenses while preserving other retirement assets. The monthly payments from a home equity loan are often more manageable than depleting savings or investments that might still be growing.
Some homeowners even use equity to modify their homes for aging in place, adding features like walk-in showers, ramps, or first-floor master suites.
Of course, this strategy requires careful planning to avoid the risk of losing your home if care needs exceed your financial resources. Have a contingency plan in place before using equity for long-term care solutions.
Tax Considerations and Benefits
The interest rate on home equity loans tends to be lower than that of credit cards and personal loans and may also offer tax benefits in certain situations. The interest paid on your home equity loan might be tax-deductible, depending on how you use the funds. Currently, interest is typically deductible when the loan amount is used for home improvements that substantially add value to your property.
Always consult with a tax professional to understand your situation and the current tax laws before making decisions based on potential tax advantages.
Know the Risks
Before tapping into your home’s equity, it’s essential to understand the potential downsides. The most significant risk is losing your home if you can’t make the payments. Unlike credit card debt or personal loans, home equity borrowing puts your property on the line as collateral.
Falling behind on payments can hurt your credit score significantly and potentially lead to foreclosure. Additionally, if property values decline, you might find yourself owing more than your home is worth, creating challenges if you need to sell your home before the loan is repaid.
To mitigate these risks, financial experts recommend:
- Never borrowing more than you absolutely need
- Having a solid repayment plan in place before borrowing
- Maintaining an emergency fund separate from your home equity
- Considering how long you plan to stay in your home
Tools and Resources
Before making decisions about home equity borrowing, take advantage of available resources. Many financial institutions offer debt consolidation calculators to help you understand potential savings when consolidating high-interest debt with home equity.
These tools allow you to input your debts, interest rates, and potential home equity loan terms to see how much you might save in monthly payments and total interest over time.
Making Your Equity Work for You
The decision to tap the equity in your home should not be taken lightly. That being said, there are many smart ways to use your home equity. You can save yourself tons in interest or rake in a hefty ROI by using those funds for one of the above-mentioned items.
Whether you’re looking to eliminate credit card debt, invest in your property’s value, or fund important life goals, home equity can be a powerful financial tool when used wisely.
Ready to hear more? APM is here to help, so give us a call today.
