The current rising home prices might make you want to tap into your current home equity. You see a nest egg sitting there and you know you have plenty you can do with it. While the money is likely accessible, not every reason is the right one to take out a home equity loan. Understanding the smart uses for your home equity can help you see the most return on your investment.
Consolidating Debt
This one is a tricky one. Yes, you can use your current home equity to consolidate your debt. If you have multiple credit card accounts and high interest loans out there, one loan payment could be a welcome relief. You can likely save quite a bit of money on interest and pay the loan off faster. However, if you pay off all of your loans with the equity in your home only to turn around and rack up each of those debts again, you didn’t gain anything. You have to be disciplined enough to stop using each of the accounts you paid off. Whether we are talking about credit cards or personal loans – keeping your debt to a minimum will help make the use of your home equity a wise decision.
Increase the Value of Your Home
Perhaps the best use of your home equity is to increase the value of your home. Any changes you can make that will have an impact on your home’s value provides a good return on your investment. Keep in mind, however, that not every change makes a difference. Try to aim for remodeling that has proven to increase the value of other homes. Following is a sample of the changes that have the greatest impact:
- Kitchen upgrades – Almost anything you do to the kitchen can have an impact on your home’s value. Changing the countertops, cabinets, or replacing old appliances can instantly help your home’s value.
- Finished basement – Finishing your basement to add living space can help your home appreciate. Whether you add a room to watch TV and entertain or you include a bedroom and bathroom, the basement will help increase the price of your home.
- Updated bathroom – Does your bathroom still have wallpaper from the 70s and an old pedestal sink? Consider upgrading the function and look of the bathroom and see a nice return on your investment.
- Exterior improvements – A few changes you make outdoors may even give your home a little boost. Things like a patio, deck, or elaborate landscaping can increase your home’s value as well as its curb appeal, which can help when you decide to sell your home.
Using the funds from your home’s equity to make any changes to your home usually has a positive impact on your financial future. Just keep in mind that it may take a while to see the appreciation. If you plan to move right away, you might not get an instant return on your investment.
College Tuition
College gets more and more expensive every year. If you have one or more children to send off to college, you might panic at the thought of paying for it. While there are student loans available, they often carry hefty interest rates. After you determine you have exhausted all resources for federal assistance with tuition, consider using the equity in your home. You will likely receive a lower interest rate than you would for a student loan, helping you pay the loans off faster.
Large Unexpected Expenses
Life happens and oftentimes when we least expect it. If you have large medical bills looming over your head or other one-time occurrence bills, your home equity can help keep you out of trouble. It also serves as a nice emergency fund to help you in those times. In this case, a home equity line of credit is a great way to have the money available without really touching it. You can take the loan out, but leave it in its account. This way you don’t have to make any monthly payments on the loan. If and when you need to use the money, the line is there waiting for you. Once you draw money out, your monthly payments begin. The first 10 years or so, depending on the program you use, will only require interest payments. Once the draw period is over, though, you have to start paying the principal and interest back for the remainder of the term.
Using your current home equity can be a good decision if you use it wisely. Obviously, the smartest way to use it is to reinvest in your home. This way when you do sell your home, you get a larger return on your investment. If you use the money for other purposes, you won’t see a return on your investment when you sell the home, but you might be able to keep other expenses down. For example, if you consolidate debt or pay college tuition, you might save on interest and other costs. This could help you save money in the long run.
Before you decide to tap into your home’s equity, figure out if there is any other way for you to fund the expense. If you decide it is the right decision, shop around to find the best deal available. Every home equity lender offers different programs. Make sure you pay close attention not only to the current interest rate, but also to what the rate could change to in the future. You should also look at the APR, which is the interest rate plus all of the closing costs and how they affect you over the life of the loan.
As always, be smart with your funds and only use the money from your home equity on things that will benefit you in the long run. Try to stay away from paying for vacations, weddings, or other non-essential things that you could otherwise save for and keep the equity in your home to help further the investment in your home.
