Top 5 ways to make the most of your home equity line

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A home equity loan or line of credit can be a powerful financial tool, if you know how to use it wisely.

If your home has increased in value and you’ve been paying your mortgage balance down over time, you likely have equity available to fund any number of projects and expenses — but you need to use these funds carefully. Using your equity to buy a new car (a depreciating asset) or to fund a one-time experience like a vacation or a wedding wouldn’t be considered a great investment since you’ll be paying interest on these with little to no chance of a return.

The best uses for a home equity line are ones that would be considered investments in your future. We have put together a list of five of the smartest ways for you to use your home equity funds below.

Top 5 ways to make the most of your home equity line

1. Make strategic and timely home improvements

Home Improvement Renovation UpgradeOne 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.

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. Using your home equity to finance these costs ensures that necessary repairs get done and the property doesn’t depreciate or decline over time due to a lack of cash on-hand.

2. Pay off your higher interest debts

Saving Money Debt Consolidation

Consider the fact that the current average APR across all credit cards is 15.10% as of Q3 2019 according to Federal Reserve data — the highest it’s been since the mid 1990’s. It’s even higher when you include only card accounts where interest is being assessed, reaching an average APR of 16.97%. Home equity loan rates with lenders like Figure.com are often less than half of this.

By consolidating your debts you can potentially pay less interest and, depending on the repayment schedule, pay your debts off sooner.

The one important caveat here is that once your credit cards 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.

3. Create an emergency fund

Emergency Fund Financial shieldAn un-tapped 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 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 a home equity line in place in case of a rainy day (or leaky roof) can give you some breathing room while you continue to build up your reserves.

4. Bridge the gap on your next home purchase

Home Purchase Home SaleWhen 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 next home can help you bridge the gap, without actually getting a bridge loan (which is a different type of loan altogether). This is only ideal, of course, if you can handle making more than one mortgage payment while waiting for your old home to sell.

Once your 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 hopefully just long enough to ensure your move is a seamless transition from one property to the next.

5. Invest in education

College Graduate Student

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.

Home equity lines also have an advantage over tax-advantaged 529 investment plans — because they are considered secured loans (tied to real property) the interest rates are generally lower on home equity loans and lines of credit.

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 making their mortgage payments. Using these funds to invest in your future is the smartest and best way to ensure you’re really making the most of your home equity line.

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