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How to Utilize Your Home Equity Effectively

January 12, 2025

If you’ve been paying off your mortgage for years, chances are you have built up excellent equity. After all, building equity is one of the biggest benefits to owning a home. Did you know you can tap into that equity? We’re breaking down all the ways you can utilize your home equity to improve your financial circumstances.

How to Use Your Home Equity Wisely?

According to the Home Equity and Underwater Report for the second quarter of 2024, 49.2% of mortgaged homes in the U.S. are equity-rich. This means the outstanding loan balances on these homes are less than half of their estimated market values.

Not surprisingly, it’s common for homeowners who are equity-rich to ask questions like, “How can I use my home equity to my advantage?” “What do most people use home equity for?” “How do I get the most out of my home equity?” and “How can I make money from my home equity?” The answers come in varied forms, and what might work best for you depends on your circumstances.

Pay Off High-Interest Debt

Data collated by the Consumer Financial Protection Bureau indicates that the average annual percentage rate (APR) on credit cards increased from 12.9% in 2013 to 22.8% in 2023. In December 2024, this number stood at over 23%.

On the other hand, the average home equity loan rate currently stands at less than 8.5%. Given that credit cards typically attract much higher interest than home equity loans, it might make sense to use the latter to pay off the former. This can also be the case if you’re paying off a high-interest student loan.

Repairs and Renovations

A distinct benefit of using the proceeds of a home equity loan or line of credit to carry out your home’s repairs or renovations is that the interest you pay might be tax-deductible. However, you should consider seeking advice from a tax consultant to get case-specific information about this aspect. Projects that typically qualify include:

• Adding a bathroom.
• Adding a swimming pool.
• Adding a porch, deck, or patio.
• Upgrading an HVAC system.
• Installing a new roof.
• Driveway resurfacing.
• Insulating walls, doors, and windows.
• Replacing plumbing/electrical systems.

Buy a Second Home

Using the equity from your home to buy a second home can be tricky, but it is possible. For starters, you need to look at existing interest rates and determine if they work in your favor. When done right, investing your equity in a second home can result in rental income that can help pay off the mortgage to some degree. Alternatively, you may even profit by fixing and flipping a home.

Launch a Business

One reason why people think about using their home equity to start a business is that qualifying for business loans can be challenging and they tend to come with high interest rates. If you plan to tread this path, remember that it may take several years before you start seeing profits, depending on the type of business you run. You should also:

• Have a business structure that presents no risk to your house.
• Have suitable liability and business insurance.
• Have a conservative projection of income that allows you to repay your debt.

If you’re new to the business world, account for the fact that around 20% of businesses fail within the first year of operation, and think about using your home equity only if you’re sure of succeeding in your venture. Seeking advice from a business consultant might be in your best interest. You should also create a strong business plan and budget for unexpected expenses.

Fund Higher Education

Given that most of the top colleges in the U.S. and globally offer online courses, it’s easy to access education from practically anywhere, and if you opt for an expensive course, you may consider tapping into your home’s equity. One benefit of getting a home equity loan over a private student loan is that the former tends to come with a lower interest rate. In addition, the interest you pay can be tax deductible, details of which you should confirm with your tax advisor/consultant.

One potential drawback of using your home equity to fund higher education is that a change in your financial situation might make it challenging to keep up with mortgage payments. Besides, you might take longer than expected to complete the course. Before you decide to study further, it makes sense to determine the value you stand to receive beyond the certification and how it will help in your career’s progression.

Pay Medical Expenses

There is no single best time to take equity out of your home, and in some instances, it’s to deal with medical expenses. Medical debt can add up very quickly, and things can get further out of hand if you use high-interest products like credit cards to pay the bills. While a home equity loan or line of credit can help you get rid of high-interest medical debt, it can also give you access to funds to take care of ongoing treatment.

Use It for Retirement

Homeowners who are close to retiring or have retired already get different ways to use the equity they build in their homes. There is no single best way to use home equity in retirement and the one that works best for you depends on your requirements and goals. While you have the option of getting a home equity loan or line of credit, both require that you repay the money you borrow. Other more suitable alternatives for retirees include:

• Reverse mortgage. Some feel that the best way to use home equity in retirement is to opt for a reverse mortgage, and you can get one if you’re 62 years old or older. In this case, you don’t have to make any payments. Instead, the lender pays you money, either in a lump sum or in the form of monthly payments. Repayment enters the picture after you pass away, sell the house, or move. You heirs get the option to repay the debt and purchase the home, after accounting for your equity that remains. Please note that you must maintain and occupy the property, as well as pay all real estate taxes on time.
• Downsize. Another good way to use home equity in retirement is to downsize, provided you don’t mind moving into a smaller home. This way, while you continue to remain a homeowner, you get access to some extra money as well.

How Not to Use Your Home Equity

If you plan to take a home equity loan to consolidate debt, make sure you address why you’re in debt in the first place. After all, it does not make sense to consolidate your existing debt if you continue spending indiscriminately and lead a lifestyle that’s out of your means. Here are a few other ways that you should steer clear of in using your home equity.

• Funding a lavish wedding or vacation.
• Buying an automobile.
• Buying luxury items.
• Making speculative investments.
• Paying for minor repairs and emergencies.
• Paying for your children’s college education.

How to Get Equity Out of Your Home Without Refinancing?

While refinancing a mortgage comes with multiple benefits like the possibility of a lower interest rate and the ability to choose how much you wish to borrow, there are other ways to tap into the equity you build in your home.

• Home equity loan. A home equity loan comes with a lump sum payment that you may use in any manner. You need to repay the money you borrow along with interest within a predetermined time period that typically varies from five to 15 years. Home equity loans tend to come with fixed interest rates.
• Home equity line of credit. A home equity line of credit (HELOC) gives you access to a revolving line of credit over a period of up to 10 years. While you must make interest-only payments during this period, you may also choose to make payments to bring down the principal amount. The repayment period follows, and it can vary from 10 to 20 years. HELOCs typically come with variable interest rates.
• Cash-out refinance. A cash-out refinance allows you to borrow more than how much you owe on your existing mortgage, and you may use the difference for any purpose. This can be a good option if you’re getting a noticeably lower interest rate than your existing one, if your home’s value has increased significantly, or if you need funds to manage investments.

Getting Pre-Approved

Whether you wish to get a home equity loan or a HELOC, getting pre-approved gives you a clear indication of how much a lender is willing to lend and the interest rate that might apply to your mortgage. Much like when you got your original mortgage, you may expect the lender to go through details surrounding your creditworthiness, employment, income, savings, and debt. In addition, while most lenders look for credit scores of 680 or higher, a few are willing to go as low as 620.

Conclusion

How do you smartly use home equity? As you can see, there is no surefire answer to this question, and it’s crucial for you to analyze your situation before deciding to move forward. Whether you want to use the money to consolidate high-interest debt, renovate your home, or buy a second property, make sure you weigh the pros and possible cons at the onset. Once you decide to move forward, contact a reputable mortgage provider that offers home equity loans, and get a pre-approval.