6 Ways to Use the Equity in Your Home
Every month you pay your mortgage, you increase the equity in your home. Over time, this means that you have tens or even hundreds of thousands of dollars in equity. Ultimately, you will get that money when you sell your home, but most people are also able to access up to 65 percent of the equity they have in their home through a home equity loan or a home equity line of credit (HELOC).
You can certainly keep your equity right where it is, but if you’re feeling a bit of a financial pinch, you may want to use the equity in your home for some of the following things.
Repairs, Maintenance and Renovation
Home repairs and maintenance are a necessary part of homeownership, but there’s not always a lot of room in the budget, especially if you’re facing high-cost repairs, like a new roof. A HELOC helps you to make the repairs as needed while making payments for them over time. Carefully consider your options before you take out a HELOC, though, because you may be able to get a better deal elsewhere. For instance, Home Depot sometimes has zero-interest financing on purchases over a certain amount of money for a certain period of time. If you’re able to pay off the balance within that time frame, this is a better deal than paying interest on the HELOC.
A HELOC can also be a good choice for a home renovation project, which can sometimes be hard to budget for. You may not know the full cost of the renovation until it’s complete, but with a HELOC you can choose to only withdraw part of the money if you wish. So while you may be approved for, say, a $100,000 line of credit based on our equity, you could choose to withdraw (and pay interest on) only $50,000 if you wanted. This gives you the flexibility to adjust the amount you have available should a renovation prove to be more complicated than you initially expected.
Additions and Upgrades
People often use their equity to make some changes to the interior and exterior of the home. You could use the equity to build an addition or finish the basement if your home feels small. You could upgrade the kitchen or build an ensuite into the master bedroom. This is generally a good idea for those who like where their home is located but want to make a few changes to make the home better. If you’re thinking about moving soon, though, you may not want to put a lot of money into upgrades. You rarely get everything you put into the upgrades back in resale value.
Down Payment on a New Home
Perhaps the most common use of the equity in a home is for the down payment on a new home. Families looking to move up often have just enough equity in their starter home to make a sizeable down payment on a larger family home. Retirees are sometimes able to pay for the full cost of their new home using the equity from their family home. At the very least, they’ll be able to have a large enough down payment that the home they live in during their retirement years is the affordable price that’s so important to find when living on a fixed income.
Other Moving Costs
Everyone thinks about the cost of the down payment when they’re moving to a new home, but it’s easy to forget some of the other costs that can be involved, like closing and moving costs. It’s nice to have the equity to cover these things so that your budget isn’t stretched too far.
If you have a lot of high-interest debt, a home equity loan may be what you need to get out of debt. It’s hard to pay down high-interest debts because so much of the payment goes toward interest. With the lower interest rates that you get with a home equity loan – along with a set monthly payment – you’re able to pay things off at a steady rate.
The downside to this, though, is that you’re taking unsecured debt and turning it into secured debt. What exactly does this mean? If you don’t pay your credit cards, there’s little the bank can do to get their money. However, if you don’t pay off a home equity loan, the bank can use your home as an asset to recover their money. You should only use a HELOC to pay off debt you know you can pay back.
Living Expenses in the Retirement Years
Sometimes, people plan to use the equity in their home for their living expenses once they retire. You could sell the home, then invest the proceeds in some safe investments and withdraw some of the money each year. You can also look into a reverse mortgage, which can give you access to the equity with some small monthly payments. Reverse mortgages can be a bit risky, as the money you borrow will eventually have to be paid in full once you pass on, and in some cases, the amount owed exceeds the value of the home. Talk to a financial advisor if you’re considering this.
You’ve worked hard to build up the equity in your home, and you deserve to make use of it. No matter what you want to use it for, taking out a HELOC is an easy way to get the money you need.