Top 10 Ways to Use Your Home Equity

As home prices continue to soar, many homeowners are at an advantage when it comes to tapping into their home’s value. However, just because you might have an abundance of equity, it doesn’t mean you know how to use it to your advantage. You can tap into your equity through a home equity line of credit (HELOC). Here are some of the best ways to use your home equity in ways that make sense financially, especially while your home is currently worth more.

What is home equity?

Home equity is simply the difference between how much your home is worth and how much you owe on your mortgage. Each month, as you make timely mortgage payments, the principal balance on your mortgage reduces and home equity is built. If your current mortgage balance is lower than your home’s value, you may be able to convert part of the positive balance into cash. If used wisely, you can use the value of your home to pay for other expenses by opting for a HELOC.

A HELOC is a revolving line of credit that works like a credit card. You only pay back what you spend, plus interest, and you can reuse it as long as the draw term has not expired. This is a great option if you have ongoing projects or if an unforeseen event arises.

10 best ways to use your home equity

There are many ways to use your home equity, however some options may end up hurting your long-term financial health. Here are some smart options for utilizing your home equity.

1. Tackle a home improvement project.

Your next home improvement project can be funded by your real estate equity. However, not all expenses will qualify for tax refunds or add value to your home. To maximize the funds from you home equity, consider these common home improvements that may qualify for tax deductions. Consult a tax adviser for further information regarding the deductibility of interest and charges.

• Replacing an HVAC system
• Energy-efficient improvements
• Resurfacing your driveway
• A new roof
• Decks and porches
• Home improvements for medical purposes
• Installing insulation
• New windows
• Plumbing and electrical
• Swimming pool
• Additions
• Adding a bathroom

2. Reduce your interest rate with a refinance.

Say goodbye to pesky private mortgage insurance (PMI) payments and high interest rates when you opt for a refinance. A refinance is a new loan which may offer better interest rates and a potentially lower monthly payment than you had on your original loan depending on market conditions.

3. Use the extra money to consolidate debts.

Using your home equity to consolidate outstanding debts is beneficial because a home equity loan or line of credit typically has a lower interest rate than other types of loans. If you are saddled with thousands of dollars’ worth of credit card debt, this may be a smart financial move.

4. Cover outstanding medical expenses.

If you are struggling to pay your outstanding medical bills or those of a family member, using your home equity could provide some relief.

5. Pay off student loan debt or your child’s college tuition.

Whether you have your own student loan debt to pay off or need to help support your children with furthering their education, using the equity in your home is an option.

6. Make retirement adjustments.

If retirement is just around the corner, there are many ways you can use your home equity to improve your quality of life. You can use the funds to downsize your home, generate additional retirement income, balance stock market investments, or even make accessibility renovations if your physical needs change.

7. Add an addition to your home.

If your space is getting cramped, but a move just isn’t in the cards, using the equity in your home to increase square footage is ideal. Instead of opting for an expensive move, adding a game room, bathroom, or bedroom can save you money in the long-run.

8. Make a down payment on an investment property.

Are you ready to start your real estate investing career? Depending on the health of your credit score you will need to put down a minimum down payment which you could pay with the home equity of your primary home as collateral. The rental home should eventually cover the costs of your current mortgage payments and so on as you invest in more real estate to bolster your wealth.

9. Start a new business.

Whether you are building your own start-up, freelancing, or opening a franchise, you can tap into your home equity to help you access funds to pay for potentially expensive start-up costs, instead of using your personal savings.

10. Start an emergency fund.

Sometimes life happens, and when unforeseen events occur, it can be smart to use your home equity in some emergency situations such as losing your job, medical bills, or short-or long-term disability.