How to use home equity

Home equity is one of the most powerful financial tools available to homeowners. While it’s relatively simple to access, it has the ability to improve lives dramatically. Discover how to use your home equity to benefit both you and your family for years to come.

What is home equity?

Home equity is the difference between the value of your home and the balance(s) of any mortgages owed on the property. This leaves you with the dollar amount available to borrow based on a lender’s requirements.

Here’s an example: Suppose your house has a current value of $300,000, and you still owe $120,000. Subtracting $120,000 from $300,000 leaves $180,000, which is the amount you’ve paid so far. In other words, you have $180,000 of home equity.

Ways to use home equity

Homeowners have discovered countless ways to use home equity. While your circumstances and needs may differ, here are a few of the more common uses of home equity:

Debt consolidation
Home improvements
Emergency expenses
Education
Business expenses
Investment property

Let’s take a look at each of these:

Debt consolidation

Consolidating your high-interest debt into one payment can have at least two benefits. It can lower your interest payments and it can reduce your debt-related stress.

Home equity lines of credit (HELOC) typically have a lower interest rate than credit cards and personal loans. The average interest rate on popular credit cards is over 20%. Meanwhile, personal loans also average a double-digit interest rate of around 12%.*

If you have several credit cards and personal loans, managing your payments can be time-consuming and confusing. For example, each may have a different due date each month.

You can reduce both your interest payments and your mental stress by using a home equity line of credit to pay off your credit cards and personal loans. Then, instead of juggling multiple payments, you’ll only have the equity line of credit to repay.

* “Paying off unsecured debt with a HELOC makes it secured.”

Home improvements

Your home is often your largest investment. It makes sense to keep it in the best shape possible — especially if you plan to sell your home one day. A home equity line of credit can give you the funds you need to repair and upgrade your home. Kitchens and bathrooms are often the most expensive rooms to renovate. They’re also the rooms potential buyers are most interested in. A HELOC can help you make your home more comfortable for you and your family now, and make it more appealing to potential buyers in the future.

Emergency expenses

Life can present you with financial burdens when you least expect them. At those times, it’s helpful to have an emergency fund available.
Experts often recommend that the fund contain at least enough to support your family for three to six months. Unfortunately, this is not practical for most families.

If an emergency fund isn’t an option, your solution could be a home equity line of credit. Because a HELOC can be used for any purpose, it doesn’t matter what type of emergency expense you face. You don’t have to explain how you intend to use the money.

Education

Higher education costs can place a tremendous burden on a family’s finances. This is especially true if it seems the only option is a private student loan because the lower the borrower’s credit score, the higher the interest rate. Plus, it can take quite a long time to pay back this type of loan.

A HELOC can provide funds for higher education without the huge interest rates. This line of credit can be even more important when there’s more than one student in a household. Instead of applying for and managing two or more student loans, you can simply open a single HELOC.

Business expenses

A large percentage of businesses fail due to a lack of capital. You may be able to prevent your business from becoming part of this statistic by using a HELOC.

Traditionally, business owners in need of funds have turned to small business loans. However, the interest rate for a HELOC could be more favorable than that of a business loan.

In addition, if your business is relatively new, you may not qualify for a business loan from some lenders. On the other hand, a HELOC is based on your home’s equity, not your business track record.

Investment property

If you’re thinking of investing in real estate, a HELOC could provide a larger loan amount than other funding options, like a personal loan.

Investment properties might include acquiring rental property and acting as a landlord; buying, refurbishing, and selling (aka “flipping”) properties; or even investing in a real estate trust where you benefit from rental income and appreciation while someone else handles all the details.

How to get equity out of your home

Accessing your home’s equity isn’t complicated. You can simply apply for a HELOC with a reputable lender, such as Homebridge.

The lender will calculate how much of your home’s equity you can borrow. Then, just decide how much you want and how you want the funds distributed.
For example, Homebridge can make payments directly to your credit card companies and other lenders if you’re trying to pay off your debt.

When you should NOT use home equity

You can certainly use your home equity however you please, but you may want to think twice for some things.

For example, you shouldn’t use a HELOC for everyday expenses. If you need a line of credit to cover basic needs like groceries, it may be time to reexamine your budget and lifestyle. You also don’t want to use a HELOC to purchase unnecessary luxury items, such as vacations.

Overall, try to avoid using your HELOC for anything that won’t add long-term value to you and your family.

Should you use your home equity?

Before deciding whether to access your home equity, ask yourself some basic questions. Will you use these funds for a worthwhile purpose, such as debt consolidation or home improvement? If so, it may be time to apply for a HELOC.

Learn more about a Homebridge HELOC!

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