Best Ways Homeowners Can Use Their Equity
Best Ways Homeowners Can Use Their Equity What is Home Equity?
Home equity is the percentage of your home that is paid off or the difference between what you bought the home for and how much money is left on your mortgage. In other words, it’s the portion of your home that you own outright. Building up equity in your home allows you to build generational wealth at the same time, while also allowing homeowners financial flexibility to access their home equity.
Tapping into your home’s equity can be an easy strategy to quickly get cash to pay for home renovations or big-budget items. Common ways of tapping into your home’s equity include a cash-out refinance, a home equity loan, or a home equity line of credit (HELOC). While borrowing money against your house can be risky, with proper planning it can also be done in a safe and low-risk manner.
5 Best Ways to Use Your Home Equity
Tapping into your home equity can be a relatively easy and low-cost method to borrow lots of money at favorable interest rates. Here are the 5 best ways to use your home equity, if you decide to go down that route.
1. Home Improvement and Maintenance Costs
Using the value of your home to upgrade or repair your home will maintain or increase the value of your house over the long term. Because of this, home improvement projects are the best way to tap into your home’s equity.
Other than increasing your home’s value, home improvement projects can also attract more interest from prospective buyers when you decide to sell your home. These projects also make your home more enjoyable to live in. Large projects like kitchen renovations, bathroom remodels, or patio installations simultaneously upgrade your home’s value, aesthetic appeal, and livability.
If you use a home equity loan or a home equity line of credit for home improvements, you can deduct the interest paid on loans of up to $750,000 from your taxes, as long as you use the loan funds to buy, build or upgrade the home responsible for the loan.
2. Consolidate Your Debt
A Home equity line of credit or home equity loan can be an effective way to consolidate high-interest debt at a lower interest rate. Large personal debts include monthly car payments or long-term credit card debt. Choosing this option can allow a homeowner to consolidate debt at a much lower rate over a longer period of time, thereby reducing monthly expenses.
If you owe a large amount of unsecured debt with high interest rates, you may have issues paying your monthly bills. In this case, you may want to explore consolidating debt at a lower interest rate, which can make paying your debts more realistic.
However, this method may be risky, as you are now using your home to back your unsecured debt. This means that defaulting on your debt could result in foreclosure on your home, so only choose this method if you are sure you can pay off the debt backed by your home.
3. Access Funds in Case of an Emergency
If you face a financial emergency, such as losing most or all of your income or incurring large medical or car bills, a home equity loan can keep you from defaulting on your payments. This is the ast resort for most people, and should only be taken out if you know that your financial situation is temporary.
Tapping into your home equity to cover emergency expenses can benefit some people, but can also add unpayable debt without proper planning and execution. To avoid this scenario, try building up a stronger emergency fund
If you have an emergency and no other way to pay off your bills, tapping your home’s equity may work. However, the risky nature of the process and the lengthy application period for home equity loans isn’t always useful for time-sensitive financial emergencies.
4. Fund Your Business
Business owners can use their home equity to grow their company’s operations. This can be a good option for those who can save money on interest through a home equity loan or line of credit. While it may go without saying, make sure to do your due diligence before taking out a business loan backed by your home. While you may be able to borrow at a lower interest rate, you should make sure that you will be able to pay off your debt, or else you will be at risk of foreclosure.
5. Other Large Expenses
You can tap into your home’s equity to pay for other large expenses, such as college or your dream wedding. As with other expenses, the main benefit to tapping into your home equity is the opportunity for a lower interest rate on your debt, but the risks associated with borrowing against your home are steep.