If you’ve paid a significant amount of your loan’s balance down, you may have some decent home equity. Even if you’ve only paid on your loan for a little while, but your home appreciated, you may have more equity than you thought. Should you use the equity? If so, what’s the best use for it?
Keep reading to find out the top five uses for your home equity.
Renovate your Home
Hands down, the best use for your home equity is to invest it right back into your home. Whether you are replacing the roof, adding rooms onto the home, or redoing the flooring, you could add value to your home. The money that you take out of your home, you will earn right back with your home’s appreciation. While it won’t be a dollar-for-dollar return, you’ll at least see something.
If you have any thoughts of renovating your kitchen with your home equity, you’ll earn the largest return on your investment. Buyers today often put the most emphasis on the kitchen, making it the one area that offers the largest return. You don’t even have to make major renovations in order to get a return on your investment. Small changes, such as new flooring or re-facing the cabinets can have a dramatic effect on your investment.
Buy Investment Homes
If you’ve had your heart set on investing in real estate, you can use your home equity to get you started. It’s no secret that investors need down payments to get financing. Lenders don’t want to take the chance of minimal down payments on a home that you aren’t going to live in full-time. It would be easy to walk away from an investment home since you don’t need it as your own shelter.
You can get access to your home’s equity with a cash-out refinance or home equity loan. You can then use the cash that you receive to put down on an investment property. This may open up more opportunities for financing your investment property, especially if you can put at least 20% down on the home.
Save for an Emergency
If you don’t have a substantial emergency fund set up, you may want to tap into your home’s equity for this purpose. The best way to do this is to apply for a home equity line of credit. This way you have the money available to you, but sitting in an account untouched. If you don’t use the funds, you don’t have to make payments, not even interest.
It isn’t until you draw the funds out of the account that you owe interest on the loan. You can make interest only payments for the first 10 years of the loan. After that point, you go into the repayment period where you pay back both principal and interest on the loan. If you never used it, you can close the account and apply for another one to serve as your emergency fund if you still need it.
Pay for College
If your kids are college-bound and you’ve exhausted your options for federal student loans and financial aid, you may use your home equity to pay for college. The interest rates charged on a mortgage are typically lower than what you might get on a private student loan.
Just be careful with the term that you choose for the loan. Student loans are typically for 7 – 10 years. If you choose a mortgage with a 30-year term, you can greatly increase the interest charges on the loan because of how long you have the money outstanding. Try to keep the term as short as possible and pay the loan off as fast as you can in order to minimize the amount of interest that you pay on the loan.
Pay off Debts
If you are in over your head in debt, you may use your home’s equity to pay the debts off in full. You should proceed with caution though. First, figure out why you are in debt. Did you have a financial emergency or do you just overspend? You’ll need to evaluate your habits before you jump in headfirst.
If you are a spender, you might be tempted to charge everything up again after clearing your debts out and wrapping them into your mortgage. This would just put you right back where you started – that’s not the point. Instead, you need to be able to avoid using your credit cards again. You want to focus on paying off the mortgage that you just wrapped your debts into. You should also try to keep the term of the mortgage that you take to pay off your debts as short as possible. Extending the debt out for 30 years might defeat the purpose of paying it off as you’ll pay more money in interest over the life of the loan.
Using your home equity can be a good thing, if you use it wisely. Don’t assume that anything you do with the funds is worth it. This is especially important if you plan to use the funds for retirement. Make sure there is some type of return on your investment or savings that you’ll earn just by using your home equity before you do it.Click to See the Latest Mortgage Rates»