What Can You Do With Your Home’s Equity? Here are 7 Helpful Ideas
Your home is probably your most valuable asset. It’s not just a place you stream your favorite shows – it’s also an investment. The best part of being a homeowner is the financial freedom and power you achieve once you build equity.
If you own your home outright or have a low mortgage balance, there are several ways you can use your home’s equity. You can add value to your home or improve your financial position using the best home equity loan company. So, how can you leverage the equity in your home?
First, let’s discuss what is a home equity loan and how it works.
How Home Equity Works
When you use your home equity to access financing, your home is the collateral. This means if you don’t repay the loan as per the terms of the agreement, the lender may sell your property to recoup the money they loaned to you.
In most home equity financing methods, lenders allow you to borrow up to 80% of your home’s value less your mortgage balance. But factors like your debt-to-income ratio (DTI), credit score, loan-to-value ratio (LTV), and annual income come into play to determine how much you can borrow.
Let’s say you own a property worth $400,000, with a mortgage balance of $100,000. The amount you can borrow is (80% of $400,000) = $320,000 less $100,000 to get $220,000.
The most common ways to access your home’s equity are:
- Home equity lines of credit (HELOCs). In a HELOC, you’re given a preset amount of credit which you withdraw and repay anytime, so long as you don’t exceed the credit limit. As you pay it off, your credit is replenished.
- Home equity loan. A home equity loan is a second mortgage in which you receive a lump sum amount upfront and repay it in fixed installments for a predefined period.
- Cash-out refinance. In a cash-out refinance, you take a larger loan than your current mortgage and receive the difference in cash.
Compare these options and choose what best suits your situation and financial needs. It’s best to involve a financial advisor to help you make the right decision. That said, here are some of the best ways you can make use of your home equity.
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7 Smart Ways to Use Your Home Equity
Home improvements
If you haven’t updated your kitchen, added a deck to the back of your house, or renovated an outdated bathroom lately, there’s no time like the present. Home improvements can increase the value of your home and improve its quality—not to mention make it more comfortable for you and your family. If getting these improvements done has been on your mind, but you’re unsure how they’d be financed, why not consider your home equity?
There are benefits to using your home equity to finance projects such as remodeling or adding square footage. First, it’s flexible: Because the money comes from an interest-bearing asset rather than credit cards or loans secured by other assets (like cars), you’ll likely have far fewer restrictions about what improvements you can make.
Also, as per the IRS, the interest paid on your home equity loan is tax-deductible if you use the funds to buy, build or substantially improve the home that secures the loan.
Pay college costs
There are a number of options to finance college tuition, from federal and private student loans to personal loans.However, using your home to fund education for yourself or your family is also possible.
Using your home equity to pay for college expenses is a good option when the interest rates are lower compared to student loan rates. It also allows students to graduate with lower debt loads.
It’s also possible to extend the term of your debt by using your home equity, which means you will have more time before you have to worry about making payments or affecting your credit score. If you’re funding your child’s education, find out whether you can fully repay the loan before retirement . If not, a student loan may be a better option because they’ll have more years of earning income to repay the loan.
Debt consolidation
Refinancing your mortgage can be a great way to consolidate your debt if you have credit card debt, student loans, or other types of personal loans.You could take out a home equity line of credit (HELOC) and use the funds to pay off your other debts.
Consolidating debt means that instead of paying off each debt separately with different interest rates and monthly payments, you can roll up all of them into one loan against your home. The benefit here is that you’ll be able to lower your overall monthly payment by having only one loan with a much lower interest rate. You can then pay off the debt faster than if you were paying off multiple loans separately over a longer period of time. Over time, you could save a lot of money.
Fund emergencies
Emergencies happen. Large medical bills and other unexpected expenses can be financially devastating if you don’t have an emergency fund. The good news is that you can use your home equity as an emergency fund to help you get through these rough patches. This works best with HELOCs because you can access the money anytime.
How much do you need in your emergency fund? It depends on your financial situation, but experts recommend three to six months’ worth of living expenses. If you’re unable to save this much, start small—with the amount of money equal to one month’s worth of living expenses—and increase it over time as needed. A HELOC can be a useful backup while you build your savings, but make sure you have a plan in place to make payments on any funds that you use.
Source: istockphoto.com
Start or expand a business
You can use your home equity for a business start-up or expansion. For example, if your company requires equipment, supplies, or services that require a substantial investment, you can use your home equity. Moreover, a home equity line of credit may be a better option for your business if it needs more capital than a business loan.
In addition to purchasing products and services with the loan proceeds, there are other ways to put your money into good use with this type of loan. For example, you can also use it as flexible working capital until sales start coming in. Putting your home on the line for your business is something you should discuss with a trusted financial advisor.
Buy a second home or investment property
Using equity from your primary residence to buy a second home can be a great way to use your home equity. If you have enough equity, you may be able to eliminate the need to get a mortgage on the property you are buying. Even if you don’t, using your home equity may mean you can make a larger down payment, simplifying qualification.
Before venturing into the world of real estate investment, however, make sure you choose the best home equity loan lender. You’ll need to have enough income to cover the mortgages on both properties. For an investment property you intend to rent, you may be allowed to use a portion of the expected rental income to help you qualify.
Interest paid on a mortgage for a second residence or vacation home may be tax deductible.
Fund your retirement
You can consider a reverse mortgage if you’re a senior (62 and above). In a reverse mortgage, you leverage the equity in your home to receive money. The best part is you don’t repay until you leave or sell the home.
The amount you can borrow is based on your age, current interest rates, home equity conversion mortgage (HECM) limits, and the value of your home. You can use the money to make home improvements, supplement your retirement income, pay for healthcare expenses, or virtually any use at all.
You can receive the money as equal monthly payments for a given period of time, a line of credit, or a combination of both.
Conclusion
Home equity loans, cash-out refinances , and home equity lines of credit are useful financial tools for homeowners.To effectively use it, you’ll need the best home equity loan company and a considerable amount of equity in your home. You can use your home equity to buy another home, pay for college costs, fund emergencies, upgrade your home, start a business, or even fund your retirement. The key is to make sure that any debt you incur through these methods is manageable and won’t burden your finances in the future.
