How To Make The Most Of Your Home Equity Line
A home equity line of credit or HELOC can be a powerful financial tool if it is used wisely.
If your home has increased in value and you’ve been paying your mortgage balance down over time, you likely have equity in your home.
Equity is the difference between the value of your home and the remaining balance you owe to the lender. A HELOC can help you unlock some of this equity to fund any number of projects and expenses — but it is important to use these funds prudently.
Using your home equity line of credit to buy a new car (a depreciating asset) or fund a one-time experience like a vacation or a wedding wouldn’t be considered a great investment.
Not only will you pay interest on the HELOC, but these purchases offer little to no chance of a monetary return on your investment.
The most productive uses for a home equity line are ones that have a return on investment greater than the HELOC’s interest rate or those considered to be an investment in your future.
Is it a good idea to take equity out of your house? We’ve put together a list of five of the most common and potentially sensible ways to use funds from a HELOC.
How to Get Equity Out of Your Home
Make strategic and timely home improvements
One of the most common reasons homeowners cite for taking out a home equity loan is to fund home improvement projects and renovations. This includes tackling needed repairs like replacing an old HVAC unit or repairing an aging roof, but could also include critical safety upgrades like bringing plumbing and electrical systems up to current standards.
If you’re wondering how to pull equity out of your home and use it wisely for your home, the best types of projects are ones that will directly increase the value of your home.
Smart choices include adding livable square footage with an addition, renovating the most-used spaces like kitchens and bathrooms, and exterior improvements that boost your “curb appeal”.
By maintaining and improving your home you’re protecting the investment you’ve made into the property.
Many homeowners use their home equity to finance necessary repairs or complete value-added improvements. It is important to consider the cost of the improvements, the expected return on the investment, and the interest rate and terms of the HELOC when considering this option.
Pay off your higher interest debts
Consider the fact that the current average APR across all credit cards is 15.13% as of Q2 2022 according to Federal Reserve data. If interest rates continue to rise, these numbers could go higher as well.
The average cost of credit card debt is even higher when you include only card accounts where interest is being assessed. These accounts carry an average APR of 16.65%. Home equity loan rates with lenders like Figure.com are often less than half of this.
By taking equity out of your home and consolidating your debts you can potentially pay less interest and, depending on the repayment schedule, pay your debts off sooner.
An important caveat here is that once your credit card debts are consolidated, you should focus on paying any new balances off in full each month to avoid racking up new debt.
If you find that this takes more financial discipline than you have, consider setting up automatic payments to ensure you’re not revolving a balance going forward, and check out other strategies to get rid of debt.
Create an emergency fund
An untapped home equity line makes an ideal primary or back-up emergency fund. Oftentimes you’re only required to start making payments once you draw on your home equity line (though some lenders do have account maintenance fees).
If you don’t already have 3 to 6 months’ worth of your living expenses set aside in case of emergency, you might feel uneasy about unexpected expenses knocking your finances off track.
Getting home equity lined up in case of a rainy day (or leaky roof) can provide peace of mind while you continue to build up other reserves.
Bridge the gap on your next home purchase
When the time comes to sell your home and move on to the next one, figuring out how to precisely time the sale of your old home to coincide with the purchase of your new home can be difficult.
Using the equity in your old home for the down payment on your new home can help you bridge the gap. This option can help you avoid the need to get a bridge loan )which is a different type of loan altogether). Bear in mind that this approach carries the risk that you may end up owning two properties for a period if your first home does not sell as soon as expected. It is only ideal if you can handle making more than one mortgage payment while waiting for your old home to sell.
Once your previous home sells, you’ll pay off each of the existing loans tied to the property with the proceeds. This may mean that you don’t have the home equity loan for very long, but it can ensure your move is a seamless transition from one property to the next.
Invest in education
Whether you’re helping your child to pay for college expenses, or furthering your own academic career, pursuing higher education is expensive. Rather than taking on high-interest, privately backed loans geared towards parents of students, consider tapping into your home equity.
A home equity line can help pay for expenses that subsidized student loans can’t cover.
Since HELOCs are considered secured loans (tied to real property), the interest rates are generally lower than other unsecured debt options.
Making the most of your home equity line allows you to tap into the reserves you’ve built up in your home. It’s a valuable financial tool available for people who may be limited by their cash flow but have gained equity through property value appreciation and payment of principal.
Using the funds from a HELOC prudently to invest in your future or put yourself in a stronger long-term financial position can be smart when done appropriately.