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4 Ways to Use Your Home Equity

Ken Venick • Aug 09, 2019

If you’re a homeowner with home equity and want to use it to your advantage, it’s important to know the smartest ways you can use it. You could borrow against the value of your home for a number of important projects without impeding your long-term financial goals.

Here are four ways you can use your home equity.

Debt Consolidation

If you have multiple credit cards or other debts you may be able to substantially lower your overall monthly payments by using your home equity.

Using home equity to consolidate your debts may be a smart option to consider, especially if your credit card interest rates are high. 

Pros

 

  • Save money on interest – consolidating high interest debts into a new loan with a lower interest rate will help save you money on interest
  • Simplify debt into one payment
  • Fixed repayment plan
  • – home equity loans have the advantage of having a fixed interest rate and monthly payments. 

 

Cons

  • Expanded repayment timeline – securing a lower monthly payment can be helpful, but could leave you in debt longer. 

Investment

Another way you can use your home equity is by investing in a second property. Buying a rental home is an investment than can earn you more money in the long run.

You can use the equity to pay for the down payment that will ideally return enough cash to cover the mortgage, property taxes and other fees that come along with it. 

Pros 

  • Building wealth – using home equity to build wealth through real estate
  • Low interest rates – home equity have one of the lowest interest rates, so it’s a cheap way to borrow money

Cons

  • Properties could lose value – there is no 100% guarantee your investment will pay off 
  • Borrowing money is a risk

Education

The rise of college tuition and fees has left many families wondering how they can afford college. The average tuition at a four-year public university reached $10,230 nationally for the 2018-19 school year, but that cost rises to $21,370 per year per year when you include room and board. 

Paying for a higher education can be expensive, but families with home equity have a unique advantage by being able to tap into their equity to help fund tuition costs. You can also use the equity to help your child pay off their student loan debt after graduation.

Pros:

  • Potential lower interest rate with home equity vs private or federal loans
  • Helps your children avoid defaulting on their student loans

Cons

  • Could miss out on federal benefits
  • Student loans will be your responsibility

Home Improvements

Using  equity loan to cover home improvements can be a great way to increase the value of your property over time. There are time where an upgrade is crucial if you need to sell your home one day or earn money back on your investment.

If you use the money to make upgrades or repairs that are needed, such as leaky faucets or plumbing, this will improve the value, and may be a financially savvy move. 

Pros:

  • Interest rates on equity loans may be lower than other options. 
  • You could recoup your investment later on.

Cons

  • You may need more money then you can borrow. 
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