How to Use Equity in Your Home (HELOCs and Home Equity Loans)

As you have paid down your mortgage and your property value has increased, you have built a valuable tool: home equity. If home values have increased significantly since you moved in, the value of your home versus what you owe may provide you with more equity than you thought. Or, perhaps you have simply lived in your home for so long that you have paid down a great deal of principal.

This article will detail some of the reasons you may want to consider turning your equity into usable funds, 10 different ways to use the equity in your home, and how you can tap into these funds.

How to use the equity in your home

Equity is often associated with funding home improvements, but that is just the beginning. Home equity can become a great resource for the cash you need to tackle your financial goals. Here are the top three reasons you may consider turning your home’s equity into funds.

1. To add value to your home: Often considered one of the best ways to use the equity in your home, drawing on this resource to make improvements and upgrades can increase or maintain your home’s value. That may be through improvement projects, adding energy-efficient appliances, or even increasing your home’s square footage. 

2. To manage or pay down high interest debt: If you have been chipping away at credit cards or higher-interest loans for a while, you might be wondering how to pay debts off faster. Leveraging equity can be an excellent way to do just that, typically with a lower interest rate. It is a good idea to have a plan to pay off the new loan and not tack on additional debt.

3. To cover large expenses: Need a lump sum of cash to cover a down payment, schooling, or unexpected medical expenses? Your equity can be used to help.

It is important to remember that a home equity loan or line of credit is still a loan. As such, there are limits to what you can borrow, there may be fees to borrow the money, and you will pay interest on the amount borrowed. 

Turning equity into cash makes the most sense when the purchase or project adds significant value to your home, places you in a better financial situation, or eases stress and provides a better quality of life. For most other purchases, preparing a savings plan to save your money over time is likely a better course of action.

In some cases, your home's value may not increase much over time. This downward trend can be related to economic downturn, extreme weather, natural disasters, or fire damage. Keep this in mind to ensure you will be able to pay your regular mortgage payments along with any fees from the line of credit or home equity loan.

10 ways to use the equity in your home

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 your 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 a Heating, Ventilation, and Air Conditioning (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

• Additions

• Adding a bathroom

2. Reduce your interest rate with a refinance.

Based on the equity you have built in your home, you may be able to lower your interest rate and may be eligible to remove your private mortgage insurance (PMI) payments when you opt for a refinance of your mortgage. 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 have 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, you may be able to use the equity in your home as 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 may be able to use the funds to generate additional retirement income, balance stock market investments, or make accessibility renovations if your physical needs change.

7. Add an addition to your home.

If your space is getting cramped, but a move is not in the cards, using the equity in your home to increase square footage may be 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? If you are looking to purchase an investment property, you may be able to use the equity in your primary residence to pay for the down payment of that purchase. 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. Handle emergency expenses. 

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. There are many reasons why you might suddenly need to dip into the equity of your home to pay for emergency expenses.

10. Create an emergency fund.

Rather than waiting until an emergency occurs, you can use your home equity to establish an emergency fund. That way, in the event something unfortunate does happen, you will not need to wait for approval on a home equity line of credit (HELOC) or home equity loan and have access to the cash as soon as you need it.

How to pull equity out of your home

Once you know what you are using your equity for, how do you get the funds? Fortunately, there are multiple ways to access your home’s equity. Two of the most common options are a home equity loan and a HELOC.

How does a home equity loan work?

A home equity loan is a loan for a fixed amount of money that you access all at once, usually with a fixed interest rate. This is advantageous if you need the funds all at once.

Here are the pros of choosing a home equity loan to access funds:

• Lump sum of funds delivered at closing

• Fixed interest rate

• Defined repayment schedule

How does a HELOC work?

A HELOC is a revolving line of credit based on the equity you have in your home. Your lender sets a limit, and you can access the funds if and when you need them during the draw period—which is often 10 years.

Here is how a HELOC works:

• Access funds when you need them throughout a specified amount of time

• Starts with a low introductory rate that becomes variable based on market conditions

• Fluctuating repayments based on amount of funds used and current interest rate

Be sure to review the differences between a home equity loan and HELOC to help determine the best solution for you.

Is a home equity loan or HELOC worth it?

If you have built up enough equity in your home and have favorable credit, you can likely leverage either of these loan options. Just remember, using a HELOC to pay off debt or using home equity for home improvements comes with factors to consider.

It is important to keep in mind that a home equity loan or line of credit is still a loan. There are limits to what you can borrow, closing costs may be included, and interest can add up over time. Yet, you can benefit from savings or alleviate financial pressure when used in the right way. Make sure that you understand the pros and cons of taking out a home equity loan and work with a trusted financial partner to help you make a favorable decision.