There is no limitation on how you can use your built up home equity, however I will share some of the potentially more advantageous ways to make the most of your home equity loan or line of credit.
1. Moving Up
The most common way owners, especially those with growing families use their home equity is by moving up to a bigger home. When you sell your home you will most likely use the sale of that home to pay off the remainder of that home’s loan or mortgage. Any remaining funds from selling your home are considered profit. The profits from your home sale are considered “liquid” home equity and can be used to purchase a bigger home and leverage your home equity even further. If your down payment is big enough, your monthly mortgage payment might be smaller than it was with the residence you sold, even if the home you sold was smaller and less expensive.
Added Bonus: If you have capital gain from the sale of your primary home you may qualify to exclude up to $250,000 of your income if single or up to $500,000 if you file a joint tax return with your spouse on your taxes. This exemption is only allowed once every two years. You can add the cost of any improvements you made to the home onto your $250,000 if single or $500,000 if married.
2. Home Improvements
Whether you are upgrading and updating your home, making it more livable, or wanting to draw more interest from potential buyers, this is a very common way home equity is used. Check out my blog “Home Remodeling - Is it Worth it?” to learn more about what renovations pay off and those that don’t.
3. College Costs
Student loans are the most common way families pay for higher education, however utilizing a home equity loan may be a great option, especially when home equity loan interest rates are lower than student loan rates.
4. Debt Consolidation
Paying off higher interest debt such as credit cards and car loans is another common way people use their home equity. This typically greatly reduces interest rates while also reducing one’s total monthly payment or expense. Keep in mind that you are turning unsecured debt into secured debt with collateral, that collateral being your home.
5. Emergency Expenses
Experts agree that you should have a minimum of three to six months of liquid funds available in order to pay your bills in case emergency strikes. For most Americans this is not the case. If you find yourself short on money due to an emergency such as an accident leaving you unable to work a home equity line of credit (HELOC) may be the smart way to stay afloat, but be sure you have a plan to repay it before overextending your financing and losing everything.
6. Long Term Investments
Home equity may provide a viable method to access the cash needed to fund other investments, such as a second home, investment property, or to purchase shares in the stock market. You can’t be sure your investment property won’t fail to bring in the rental income needed or that your stock shares won’t lose value, so be sure to weigh and consider all options before making a longer term investment using your home’s equity.
Now that you have an idea of some potentially advantageous ways your home’s equity can be utilized you are quite possibly left wondering how to capture the equity your home has built up in order to put it to use. It’s simple! You borrow money against your home!
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