How to Use the Equity in your Home–Home Improvements, Debt Payoff, and More

As you have paid down your mortgage and your property value has increased, you have built a valuable tool: equity. How will you use it?

Equity is often associated with funding home improvements, but that’s just the beginning. Let us explore three reasons you may consider using equity and exactly how you can tap into these 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. 

Make strategic home improvements

Renovations or home improvement projects make your living quarters more comfortable, create the look you desire, and–if planned with a return on investment (ROI) in mind–can increase your home’s value. Just be sure to do your research to ensure the changes you make are worth the cost. The top home improvements include:

• Landscaping and exterior door upgrades to increase curb appeal.
• Kitchen upgrades and renovations.
• Updating bathroom flooring and fixtures.

Increase energy efficiency

Another great way to create value for yourself and help optimize your home’s future resale value is to increase its energy efficiency. Bonus: You can reduce your carbon footprint and support more sustainable technologies. Some ideas:

• Weatherize your home with better insulation and new double- or triple-pane windows.
• Replace old appliances, such as the refrigerator, stove, and washer and dryer, with new, more efficient models.
• Install low-flow toilets.
• Install solar panels for some or all of your electricity.

Add additional space

Could your family use a little more elbow room? Would another bedroom or a larger family room be more appealing to a future buyer? Adding square footage to your home can increase its value when done thoughtfully.

2.   To manage 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’s a good idea to have a plan to pay off the new loan and not tack on additional debt.

Consolidate multiple debts into one payment

Whether you have credit card debt or other high-interest obligations, consolidating them into a single, smaller-interest payment can benefit you in various ways. Debt consolidation can help streamline payments, save money, or spread payments out over a longer period of time. Just remember that this technique exchanges one loan type for another that still must be paid back.

Pay off student loans

If you have student loans with high-interest and large payments, paying them off using home equity may be one solution. Just like when consolidating debt, aim to have a specific goal for when you want the debt paid off. Lowering your payment may not be best if you spread the loan out and end up paying more interest.

3. To cover large expenses

Need a lump sum of cash to cover a down payment, schooling, or unexpected medical expenses? Your equity is there to help.

Invest in real estate

It’s possible to put the equity in your home to work by investing in additional real estate. If you think that this might be a favorable option for you, then it’s a good idea to seek advice from experts, do your research, and remember that all investments are not guaranteed to go up in value. Weigh the risks before making a purchase.

Pay for college

Higher education is expensive. If your college savings and financial aid package falls short of the mark, using home equity can possibly eliminate the need for student loans. If your home equity interest rate is lower than student loan rates, this option can save you money in the long run.

Build an emergency fund

Whether we plan for them or not, rainy days are on the horizon. Many experts recommend setting aside six months’ worth of expenses in an emergency fund to cover unexpected costs due to unemployment, medical expenses, major home repairs, or any of life’s curveballs. If finances are tight, your home equity can help you build a cushion or access it immediately if an emergency strikes.

How to use the equity in your home

You have identified your need. Now 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 home equity line of credit (HELOC).

Get a lump sum of cash with a home equity loan

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.

• Lump sum of funds delivered at closing.
• Fixed interest rate.
• Defined repayment schedule.

Access cash as you need it with a HELOC

A home equity line of credit (HELOC) is a revolving line of credit based on the equity you have in your home. As with a credit card, 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.

• Access funds when you need them throughout a specified amount of time.
• Often a low introductory rate that becomes variable based on market conditions.
• Fluctuating repayments based on funds used and current interest rate.

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

Getting started

If you’ve 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: 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. Do your homework and work with a trusted financial partner to help you make a favorable decision.