4 Interesting Ways to Use Your Home Equity
by Arina Smith Real Estate 13 May 2021
Using your home equity is one of the fastest ways of gaining a cash influx as secured loans do. For many homeowners, selling their house is a much preferable option to staking their other assets.
Perhaps it is the apprehension of selling taxing holdings that can fetch capital gains in the long-term or attract withdrawal penalties that makes home equity more desirable. Whatsoever the reason though, it is wise to proceed with caution when borrowing against your house, no matter how desirable all that money seems.
Home Equity- What it is
When we talk about home equity, we refer to that portion of the house for which a homeowner has already paid. Let’s say that it is the difference between the existing market value of your house minus the amount you still owe on your mortgage.
Over time, homeowners have used home equity as a vital tool for expanding their personal wealth in the long term. Your equity keeps building as your home’s value keep increasing steadily with time and you keep paying down your mortgage principal.
Home mortgage experts describe home equity as one of the time-tested ways of building wealth. They stress home equity as a fantastic source of financing and savings. For instance, if you’ve accumulated your equity from a starter home, you could use it later to purchases a bigger family home.
Home Equity- Why use it?
Homeowners have the right to be skeptical when considering using their home equity. But truthfully, it is a low-cost and certainly a convenient way of borrowing large cash amounts at reasonable interest rates. With this approach, debt consolidation, home repairs, or other major financial projects become easy.
4 Ways of Using Your Home Equity:
Let’s take a look at four interesting ways in which you can use your home equity:
1. Debt Consolidation:
Consolidating your debts that have been accumulating over time with high-interest rates is a smart way to use your home equity. However, it is imperative to take note of a huge caveat in this process and that is the reason why your debts piled up.
Did you have to take out private loans for your children’s college or survive on credit cards when you were unemployed? As a homeowner, we believe it is crucial to address the reason for which you had to apply for debts in the first place before you can consolidate your debts using your home equity.
If you had to borrow because you had to spend beyond your means, then it is best to tackle that issue first, or else you’ll be back in the same tight spot, with even more debts.
2. Home Improvements:
One of the most common and best ways of using home equity is for home improvements. Upgrades are not only important for enhancing the comfort level of your home but also boost your home’s market value. If for no other reason, timely home improvements are necessary for attracting prospective buyers willing to pay a desirable sum when you decide to sell.
Since home improvements are major projects and usually require a big budget, home equity is, therefore, a great financial source.
Another reason why you may want to consider using home equity for your home upgrades is that you can deduct the interest you pay. for instance, you can avail of this feature if you’re home equity loan is around $750,000 and you’re using the funds to make substantial home upgrades, build or buy a home that secures your loan.
3. Investments for the long-term:
If you’re more interested in the long-term gains, you could use your home equity for investing in the real estate or stock market. Homeowners have been using their equity quite smartly for fetching returns from investments that exceed the cost of their loan.
However, if you plan to use your home equity in this way, you should be aware of the risks that come with investing in stock markets. For starters, they’re never stable and performance commonly takes a severe dip now and then.
Even with real estate, there is no way to ascertain that your investment property will fetch the returns you desire or that it will hold onto its value or life. In such a case, the facts come down to one thing: the rate of return you can achieve versus your mortgage’s interest rate (HELOC).
4. Business Expansion:
If you’re a business-oriented person or already own a business on a small scale, using your home equity to expand your business would a good idea too. If your business is running and products are in demand, you can use your home equity to provide the capital your business needs to grow.
Tapping into your home equity for this purpose might be helpful in saving on interest instead of acquiring a business loan. However, as with all other uses of home equity, you need to consider several important factors.
To be sure that using your equity loan for business is a sound idea, scrunch some numbers on your business beforehand. If there is high demand for your products, only then use your home equity for the business.
The rule is similar to that of using your equity loan for purchasing investments: there is no guarantee of the returns on investment. If the numbers present a satisfactory picture, then go ahead with the primary plan. In a favorable situation, you can even borrow money at lower interest rates with home equity instead of a loan for a small business.
You can use your home equity to finance some major home improvement projects for your residence or for improving your financial position in a certain way. However, while this idea pays off well for most homeowners, the word of caution always remains to proceed with caution and wisdom when using your home equity.
Any failure or miscalculated step n your part may cause you to lose your home and the roof over your head to foreclosure. Hence, always ensure that you run your numbers accurately, pay your regular mortgage timely in addition to your home equity loan, and proceed with a solid plan to improve your overall financial position.