Having home equity can help homeowners achieve a variety of financial goals. Here are some ways to use your home equity.
1. Home Equity Loan
A home equity loan works like a personal loan that uses your home as collateral. Most home equity loans have a fixed interest rate, and are disbursed as a lump sum. The loan has its own terms and repayment schedule. It’s important to know that you need to make payments on your home equity loan in addition to your monthly mortgage payment.
2. Home Equity Line of Credit
A home equity line of credit is similar to a home equity loan, but instead of receiving a lump sum, you get a line of credit that you can draw from as needed. Like with a home equity loan, HELOC payments are in addition to your monthly mortgage payment. HELOCs usually come with adjustable interest rates, which means the amount of interest charged and your payment amount can change.
3. Cash-Out Refinance
With a cash-out refinance, you take out a loan based on your home’s current market value, repay your previous mortgage, and keep the difference in cash. You repay the cash as part of your new mortgage. You can use that money to pay for home improvements, to consolidate high-interest debts, or pay for other major expenses.
4. Reverse Mortgage
A reverse mortgage lets older homeowners convert equity into income. Instead of making a monthly mortgage payment and reducing the balance owed, you receive payments and your principal increases. The loan is repaid when borrower no longer lives in the home — usually by selling it. This lets older homeowners afford to continue living in their homes in their later years. The downside is that they lose equity.
5. Sell Your Home
If you decide to sell your home, the proceeds will go first toward paying off your mortgage balance. You keep everything that’s left. The more equity you have, the more you’ll profit from the sale of your home.
Common Reasons To Use Home Equity
The best part of building equity is that it becomes an asset you can use when needed. If you’re not sure what to do with your home equity, here are some common reasons why folks tap into their equity:
- Home improvements. Tapping your equity can be an affordable way to pay for major upgrades that also could boost the value of your home.
- Consolidate debts. If qualified, you could use your equity to pay off high-interest debts and save money on interest.
- Education expenses. If you’re putting yourself or your children through school, you can tap into your home equity to pay tuition and other expenses.
- Medical bills. If anyone in your family has had health issues and the medical bills have piled up, you could use your equity to help pay them off.
- Boost retirement savings. You could withdraw cash to beef up your retirement savings accounts.
- Buy a new home. Whether you’re looking to upgrade or downsize, the equity in your current home can give you more purchasing power for the next one.
- Buy a second home or investment property. If you’re ready to buy an additional property, you could use some of your home equity to fund the purchase.
When Not To Use Home Equity
In general, it’s best to go into long-term debt like that only to pay for things that will increase in value over time. It’s typically not advisable to use your equity on:
- Fancy vacations. In general, you shouldn’t use your equity to spend money on things that will be over quickly and you’ll be paying off for years — like a vacation.
- Buying a car. It’s often safer to take out an auto loan than eat away at your home equity and use your home as collateral. You also don’t want to be paying for a car for 15 or 30 years when it’s unlikely you’ll drive it for that long.
- Investing. Using your home equity to make investments is risky. If the investments don’t work out, you’ll still have to repay what you borrowed.
Which Is Right for You?
To determine whether it’s a good time to tap into your home equity, first consider your financial situation:
- Have you built up enough equity to have a solid reserve?
- How much do you need to spend?
- Can you afford to take on more debt?
- Will you be using the money on something that will increase in value?
FAQ: Using Home Equity
Here are answers to some frequently asked questions about home equity.