7 ways to get the most from your home equity
You could be sitting on a gold mine and not even know it. Okay, perhaps not an actual gold mine, but something potentially better: home equity. Your home's equity is normally defined as the difference between the value of your home and how much you still have left on your mortgage.
For example, if you have a home valued at $350,000, and you have $100,000 left on your mortgage, your equity is approximately $250,000. Let's examine a few key facts about home equity before we get to the heart of the matter:
- Home prices are up 19.1% year-over year
- Tappable equity set a record in 2021, hitting $9.9 trillion
- The average homeowner has $185,000 in untapped equity
Surprising, isn't it? Right now in 2022, your home is likely worth more than it ever has been, so it's an ideal time to do something with all that built-up equity. For the purposes of this discussion, we'll take a look at several of the ways you can use your home equity to your advantage to flex your financial muscles in both in the short and long term. Let's dive in.
Buy something new
This is the most obvious route on our list, but it's worth the reminder. It stands to reason that if you're equity is so high, your potential sale price could be also. This allows you to really focus one onto your current home needs, which may have changed since you originally bought your house.
You could be looking to get something bigger to have more space for work or play, or to accommodate a growing family. On the other hand, maybe you want to downsize your house to reduce your monthly overhead and payments. The beauty of the housing market right now is that, no matter why you might want to sell, or buy, you are likely to maximize your home's value, and that's always a good thing.
Sell then rent
There are two ways you can approach this. First, you could sell your home, pocket the cash and look for a nice rental property to reduce your overall expenses and maintenance costs. This can be particularly useful to people close to retirement who want to travel, keep their attachments to a minimum, and generally enjoy the results of their hard work.
Alternatively, you could sell your home without leaving it. Leaseback options, which are mutually agreed upon before closing, allow you to effectively rent your home from the new owner for a pre-determined amount of time. That way, you still enjoy all the benefits of the equity you've built up without having to leave home! How's that for convenience?
Refinance and cash out
Another way you can go is a cash-out refinance of your home.* As the name implies, you are able to take cash out of your loan. This is ideal if you've been in your home a while, so you have plenty of equity to pull out. This often has the side-effect of raising your mortgage payment, but you may be — pleasantly — surprised just how much you can take out of your loan for only a nominal increase in your monthly budget.
It's also possible to seek a Home Equity Line of Credit, or HELOC for short. Here, you borrow against the equity of your home using the home itself as collateral. In addition to the built-in convenience of a HELOC, what you borrow is not considered taxable income, since you are, in effect, borrowing money from yourself and not seeing an increase in your earnings. This can give some definite peace of mind when Tax Day rolls around.†
See our honorable mentions list below for a sampling of things that you may want to use that influx of cash to accomplish.
Make renovations and/or improvements
The high costs of remodeling your home or making significant improvements to the property are not always within the day-to-day budget for most homeowners. Tapping into your equity for this purpose allows you to unlock any number of possibilities that might be otherwise out of reach.
On the renovation side, you could give your kitchen a top-to-bottom refresh, from appliances, countertops, cabinets and everything in between. The same goes for the bathroom in installing new sinks, a tub or completely rebuilding your shower. Don't forget the exterior of your home, when it comes to installing reinforced storm windows, metal siding, fences and landscaping.
Perhaps you're already happy with the way the house is currently. Well, there's always room for improvements. You could enclose your back porch into a solarium, add solar panels to your roof, extend your patio with a custom deck and let's not forget one of the all-time most popular improvements — a pool! Unleashing the power of your home's equity can bring these dreams of home improvement to life.
Buy a second home
You might find that your existing equity is enough to help buy a whole other property, either in full or in part. A second home could be a great boon to you if you find yourself in another part of the country on a regular basis, whether because of business, family or just because its near your favorite vacation spot. Having a second place to call home can really open the travel possibilities.
Of course, you could always use that second home for income opportunities as well. Post it online for short-term vacation rentals, so it's available when you need it yourself, and earning money for you when you don't. Or you could rent it out to tenants on a more long-term basis so that you have a constant revenue stream coming your way.
Lastly, you could always buy a house for the purposes of flipping it for resale. Considering the record-breaking housing prices we're seeing, leveraging your equity could potentially be a lucrative path to follow. Whichever way you go, investing in real estate is, historically, a proven way to manage your overall financial portfolio.
Purchase other equities
Speaking of investing, you could always use your equity to purchase stocks, bonds, and fund new business ventures. The investment opportunities are virtually unlimited when you have a ready amount of capital that can be brought to bear on one or more of these opportunities. Of course, there are no guarantees when it comes to making investments, but the potential rewards can be great indeed.
In that way, you might imagine investing as akin to planting seeds in your own financial garden with the possibility of growth on the horizon. Ultimately, if you decide to invest your equity, you are putting your money to work for you in a way that goes beyond funds just sitting idle in a bank account.
Other honorable mentions
It would be impossible to list all of the ways you could use your home equity to your advantage. The versatility it brings is part of the beauty of it, in that there are so many ways you can go. That said, there are some other challenges that your home equity can solve. Here are a few things for your consideration that we didn't touch on in the previous listings:
- Zeroing out credit cards: Credit balances can accumulate over the course of your financial career, sometimes slowly, sometimes quickly in times of emergency. When paying the minimum payments just isn't enough, you can balance the scales quickly. This is especially true of a Cash-Out refinance loan, which will likely have a much lower interest rate than credit cards, saving you a significant amount over time.
- Removing student debt: Student loans can take a long time to pay off, just ask almost any college graduate! Depending on the type of loan, you could easily wind up paying far more in interest than the original loan amount. Equity can wipe away the debt, saving you a significant amount in the long run.
- Funding college tuition: It's never too early to start planning for college. Your equity could help guarantee education expenses for your children, or for you if you should find yourself going back to school later in life. You could save yourself the hassle and expense of having to take out student loans.
- Planning for emergencies: Life happens. You can never be sure when the universe might throw you a curve ball that will be much easier to manage with a sufficient number of resources at the ready. By building up a robust emergency fund with your equity, you can give yourself a financial cushion to soften the bumps and scrapes along the way.
- Paying off medical bills: You could reduce, or even eliminate, your existing medical bills. Whether it's bills that have built up over time, or elective medical procedures, such as braces, corrective or cosmetic surgery, your equity could make that a reality without having to take out a separate loan that may have a higher interest rate.
So, as you can see, there are a vast number of ways you can turn your proverbial gold mine into something real and tangible, with real improvements to any number of areas of your life. While you should always consult with a mortgage professional or financial advisor before making major money moves, the most important choice here is in deciding how you want your home's equity to work for you.
* Using funds from a Cash-out Refinance to consolidate debt may result in the debt taking longer to pay off as it will be combined with borrower’s mortgage principle amount and will be paid off over the full loan term. Contact Proper Rate for more information
† Proper Rate does not provide tax advice. The consumer should always consult a tax advisor for information regarding the deductibility of interest and other charges in their particular situation.