5 Smart Ways to Use Your Home Equity

When was the last time you checked the value of your house? With the recent surge in demand since the start of the COVID pandemic, you may be pleasantly surprised to find that overall house prices are up 17 percent since last year.

This means for the average homeowner likely has tens of thousands of dollars at their disposal that they didn’t have before. Even if you have no plans to move, you can still tap your home’s value by taking out a home equity loan. This can be done either by borrowing a lump sum amount or by taking it a little at a time through what’s known as a HELOC (home equity line of credit).

But what should a homeowner do with all of this money? Below are five great ways to leverage the equity in your home and increase your overall net worth.

1. Home Maintenance 

One of the things that can really detract from the value of a house are any repairs that need to be made. Think about if you were a prospective buyer and saw that:

  • The carpet was worn out
  • The appliances were outdated
  • Cracks needed to be repaired
  • The roof needed re-shingled
  • Dead trees need to be removed

These are all things that might cause someone to pass on your house or offer less than what you were expecting to receive. Therefore, by taking out a home equity loan and using the funding to make these repairs, you’ll not only make your home more appealing but also increase the potential resale value.

2. Value-Added Renovations

It’s not just the necessary repairs that will add value to your home. Oftentimes making new improvements and updates will also do wonders to increase the value of your property. And a home equity loan can provide you with the financing you’ll need to give your place a facelift.

Of course, it will help to pick the projects that will strategically provide the greatest return on investment (ROI). These are updates such as:

  • Small kitchen remodels
  • Small master bathroom remodels
  • Adding landscaping
  • Adding an outdoor entertainment space (such as a deck or patio)

For more great ideas with high ROI, check out this list.

The great thing about updates such as these is that not only will increase the value of your home, but you’ll also get to enjoy them as long as you continue to stay at your residence. 

For instance, adding an outdoor entertainment area can provide years of space for people to get together and enjoy themselves during outdoor get-togethers. That’s why it’s important to also consider updates that are practical for your lifestyle as well as those that will provide a good ROI. 

3. Debt Consolidation 

Not all uses of your home equity have to be used for improvements to your home directly. Another very popular use of these funds is to pay off debt. 

For example, do you have outstanding:

  • Credit card debt?
  • Student loans?
  • Personal loans? 

If so, then a home equity loan could be used for debt consolidation. Debt consolidation is when you take out a new loan to pay off your current ones. The advantage is that your new loan will be at a lower interest rate than your current higher interest debts, and so this action will break the cycle of interest accumulation. Plus, it’s a whole lot easier to manage making payments to one loan instead of several.

For example, as of this writing, home equity loan rates are around 7 percent. Meanwhile, people with credit card debt might be accumulating anywhere from 15 to 30 percent on their outstanding balance. Therefore, using their home equity to pay down this debt and get a clean start can be a smart way to save thousands of dollars in interest down the line.

4. An Investment Property

Are you interested in becoming a landlord? Lots of people have found that owning a second property and leasing it out as an Airbnb or to long-term tenants is a great way to produce multiple income streams.

To find a good investment property, you’ll want to:

  • Research areas that are desirable such as tourist spots, college towns, etc.
  • Look for units that are in relatively good shape
  • Priced at a level you feel comfortable paying

One of the main things that real estate entrepreneurs boast about rentals is that they practically pay for themselves. For instance, if you’ve got an Airbnb that’s only occupied 50 percent of the time but still earns over $1,000 per month, then it may be enough to cover the mortgage for the property.

The hardest part is usually getting started – specifically with finding the money for a down payment and any upfront renovations that need to be done. A home equity loan could be that infusion of cash you need to get past this hurdle and get the ball rolling.

5. As an Emergency Fund

Do you have an emergency fund of 3 to 6 months’ worth of your living expenses saved? If not, we understand – saving up that much money can be hard! But it doesn’t change the fact that you’re still at risk if an unexpected bill ever comes your way and you’re not prepared to manage it.

This is where a HELOC can be useful. With a HELOC, the lender gives you a spending limit that you can’t exceed (much like a credit card). However, that doesn’t mean you have to use it. You might go a year without ever even touching this HELOC before an emergency happens (like your car breaking down or your house needs a fast repair) and you need to pay for it right away.

What’s beneficial about this strategy is that it saves you from turning to high-interest credit cards or loans to cover the emergency. The HELOC will more likely be at a much more reasonable interest rate and that will help prevent unnecessary interest from accumulating.

A Word of Caution

No matter how you decide to use or invest the equity in your home, it’s worth reminding you that in each of these instances your home will be the collateral for the loan. That means if you’re ever not able to make the payments for whatever reason, the lender can legally seize your house to recoup the balance owed.

This is why if you do decide to take out a home equity loan, be sure to prioritize it as part of your budget. You can use a helpful budgeting app like Buxfer to create your spending plan and monitor your transactions 24/7. Doing this will let you know that you’re on track and that your home is safe and secure.

Click here to find out more about how Buxfer can help you budget for your loan payments.

Image source: Pexels

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