Real estate has been a hot topic for the last few years. Most people are thrilled that their home has increased in value. This should give you home equity.
What is home equity? Home equity is the difference between what your home is worth and how much you owe.
Depending on how long you have owned your home, you may have quite a bit of home equity. But what are the best ways to use your home equity?
If you are new to home buying, be sure to check out common mistakes that first-time homebuyers make. Owning a home is most likely one of your biggest purchases ever. You want to make sure that you understand the process. If you are looking to buy a home I also recommend working with a realtor. They will guide you through the whole process.
There are many different ways to use your home equity. Some of the ways to use your home equity are for home improvements or additions. Other ways to use your home equity are for big expenses such as college.
Not everyone should be using home equity. You have to remember that you have worked hard to get your home…and you want to keep this investment. This is your home!
The reasons to use your home equity are for long-term goals. Things that add value.
Another reason to use your home equity could be to consolidate high-interest debt. You need to make sure that you don’t waste your home equity on short-term items. Examples of short term items would be luxury handbags, vacations, and dining. These items do not last long term or provide value.
Before you even think about using home equity, be sure that you have already saved for an emergency fund. This is one of the most important items to have. You always want to make sure that you have enough savings for 3-6 months’ worth of expenses. Do this before you start tapping into your home equity.
So, let’s look at the best ways to use your home equity…..
Home Improvements
One of the best ways to use your home equity is with home improvements. Home improvements can be:
- Home Additions (screened porch, decks, extra bedroom, etc.)
- New Kitchen
- Bathroom Remodel
- Garage
- New Roof
- New HVAC/Furnace
- Solar Panels
- Pool
Home improvements are something that adds value. Whether you have been dreaming about a new kitchen or adding a garage, this is one of the best ways to use your home equity.
Investment Property
Buying an investment property is another great way to use your home equity. A lot of people dream of owning a rental property or a second home. Tapping into your home equity can be one of the easiest ways to achieve that goal.
Using home equity to buy another investment is a great use of your home equity. You are essentially using your equity to invest in more potential equity.
This is what I mean by “long-term goals”
College
With the high cost of higher education, this may be one of the most economical ways to achieve that goal. Using your home equity is a good choice for a lot of people.
College loans are high…and can almost be considered predatory lending. Using your home equity to pay for college makes sense for many people.
Please be sure to weigh all your options.
Consolidate Debt
Another way to use your home equity is to consolidate debt. This makes sense for many people. When you use your home equity, you will usually lower your payment and interest rate.
The downside is you didn’t gain any value, but getting out of debt is so important. There are many ways to pay off debt , but using your home equity may be the right choice for you.
Emergency
I always preach about having an emergency fund…but you never know when you may have a big emergency. More than 3-6 months of savings can fix.
Being able to use your home equity has saved many people from disaster.
Start a Business
Most people don’t know that you can use your home equity to start a business. Finding small business loans can be difficult and the interest rates can be high.
Using your home equity can help you get a business up and running. It can also provide your small business with extra capital.
Now if using your home equity is what you want to do…there are a few ways to get your equity. The most commons ways to tap into your home equity are:
- Refinance/Cash Out: This is the process of refinancing your home. You will let the lender know the desired amount that you wish to cash out. You will be getting a larger loan. This is a good plan when the going interest rate is lower than your current rate.
- Home Equity Loan: This is a loan taken against your home equity. The lender will loan you a set amount of money. You will have a set payment and set interest rate. This is a good option when you know the exact amount you need.
- HELOC ( Home Equity Line of Credit): This is where you can borrow money from your home equity as needed. The interest rate is variable and based on market conditions. A lot of people will open a line of credit when they buy a home so that their equity is available if they need it. Once the loan is open, you do not need to apply for the loan again.
If you are in your retirement years, you may want to think about a reverse mortgage. Be sure to check out all the reasons to use a reverse mortgage.
Be sure to weigh all your options when looking to use your home equity. You do not want to overwhelm yourself.
You want to weigh out the benefits, loan terms, and interest rates. You also want to have a plan for paying back any loan that you may take out from your house.
