Key Takeaways
- Home equity can be used for many important purposes, including improving your home or consolidating debt.
- It can be useful to tap into your equity because the interest rate is often more affordable than for other kinds of loans.
- Your home is collateral for a home equity loan, so make sure you don’t put your property at risk without ensuring you can afford the payments.
Equity is the difference between the value of your home and the amount you owe on it. The equity in your home is owned by you and increases as you pay down your mortgage. The more loan principal you pay off, the more of the house you own. You can access equity by taking out a cash out refinance or home equity loan.
You can use the equity you access to accomplish important financial goals. However, the downside with these loans is that you use your home as collateral, so you put it at risk if you don't make payments.
This guide explains some options for what to do with home equity.
1. Make Home Improvements
You can use a home equity line of credit (HELOC), home equity loan, or cash out refinance to tap into your home's equity and fund a remodel or repairs. There are some benefits to borrowing to improve your home:
- Potential for your home to increase in value and a return on investment
- Possible tax benefits, as equity loans taken out for home improvements may be tax-deductible*
2. Consolidate High-Interest Debts
Home equity can be used to consolidate your debt if you owe money to different creditors. A cash out refinance, home equity loan, or home equity line of credit will often have a lower interest rate than credit cards, personal loans, and many other kinds of consumer debt. You can potentially lower your rate, reduce total borrowing costs, and simplify repayment by consolidating.
Benefits of debt consolidation using home equity can include:
- Money saved on interest
- Reduced overall monthly debt payments
- More predictable repayments
- Fewer monthly bills to manage
3. Handle Emergency Expenses
Because it is usually more affordable to borrow against your equity than to use credit cards, you can tap into equity to cover emergency expenses such as unexpected medical expenses.
Getting a HELOC can be one of the best options to do this. Depending on how your HELOC works, you can either access a line of credit or take a lump sum distribution upfront and then redraw as needed while paying back your loan.
Benefits include:
- Flexible borrowing with a HELOC
- Borrowing at an affordable rate due to equity leverage
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4. Pay for Education Expenses
You can also tap into your equity to pay college tuition. You may be able to borrow more using a HELOC, home equity loan, or cash out refinance than you could with student loans, as the amount you can borrow from the federal government is capped for certain loan programs and degrees.
Some benefits include:
- Increased flexibility, as you can borrow multiple times as needed with a HELOC
- Potentially higher loan limits
5. Fund Business or Investment Opportunities
If you want to start a business or invest in something, tapping into your equity could provide the funds to do that. While increasing your outstanding mortgage loan balances may put your home at additional risk, you may decide that access to affordable credit to pursue your chosen venture is worth the risk.
Benefits include:
- Flexibility in borrowing
- Possible access to more funds than with other borrowing options
- A potentially lower interest rate than other borrowing solutions
6. Utilize Bridge Financing
Bridge financing may be necessary if you want to buy a new home while waiting for your old one to sell. You could use equity to pay closing costs or to fund a down payment to avoid private mortgage insurance.
Advantages include:
- An easier way to budget for your new home
- The ability to make a larger down payment to save on PMI
- Potential to be financial support while you have two mortgage payments
7. Plan for Retirement Expenses
Finally, you may be able to use home equity to help you fund retirement expenses. Tapping into the equity in your home offers the following benefits:
- Supplemental income to allow you to cover your costs in retirement
- Coverage for unexpected expenses without making a large withdrawal from your retirement plans
- A financial safeguard from having to sell investments at a bad time
Final Thoughts: What Is the Best Way to Use Home Equity?
The best way to use home equity will depend on your needs. If you qualify for a HELOC, home equity loan, or cash out refinance, you may be able to use the equity that becomes available to you to accomplish whatever important financial goals you've set for yourself.
Reach out to Freedom Mortgage today to apply for a HELOC or cash out refinance option so you can move forward with achieving your dreams.
*Consult a tax advisor regarding the deductibility of interest and charges.
Christine Rakoczy has been a financial writer since 2008, contributing to major publications, including Credit Karma, CBS MoneyWatch, WSJ, and Forbes Advisor. While her special focus is diving deep into mortgages, Christine has extensive experience with all types of financial topics.
In addition to writing for online articles, Christine has also taught business administration courses at a career college and has served as a subject matter expert on numerous business and legal courses.
Christine earned her JD from UCLA School of Law in 2008 and has a BA in English, Media, and Communications, with a Certificate in Business Administration from the University of Rochester.
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