One of the primary benefits of owning your own home is the opportunity to build equity. This equity can be tapped in many ways, including home equity loans and home equity lines of credit (HELOCs), but it’s a good idea to think carefully about how you use your equity. Because you are tapping into the value of your home, make sure you are using your equity to your advantage, not accruing debt. Jan Gleisner, a trusted San Diego financial consultant, recommends a few good ways to make use of your home equity.
Pay Off High-Interest Debt
One of the most popular uses of a home equity loan is consolidating high-interest debt at a lower interest rate. The equity in your home can be used to pay off credit card debt, a car loan, and more. If you choose this option, be careful. While the interest rate is lower, you are converting an unsecured debt into debt that’s secured by your home. As long as you can afford the payments and pay down your debt quickly, it may be a wise financial decision.
Fund an Education
Using your home equity to fund a college education for yourself or your children may come with a lower interest rate than student loans. Make sure you explore all of your options, including student loans, grants, and financial aid. After all, defaulting on student loans hurts your credit and may result in wage garnishment, but defaulting on a home equity loan risks your home.
Make Home Improvements
Paying for home improvements with your equity is one of the best options because it pays off in two ways: you are increasing the value of your home—the underlying asset of the loan—and you are making improvements that will make your home more enjoyable, comfortable, and safe. You may want to update worn-out finishes and flooring in your home, add usable space, renovate a bathroom, or even make your home more accessible so you can age in place. Don’t try to renovate your home only for the financial gain, as most improvement projects do not fully recover their cost.
Buy an Investment Property
If you have an eye to the future, you may want to keep a home equity line open to jump on investment opportunities as they pop up. With a line of credit, you can access a large enough down payment to buy a rental property that can bring in steady passive income in the future, but be careful you don’t get in over your head. Consider the expected rental income, how much renovations will cost, and unexpected expenses of managing a rental property like repairs, vacancies, and evictions to make sure it will be a wise investment.
Set Aside Money for Emergencies
With a HELOC, you have a line of credit attached to your equity that you can use as needed. Keeping an equity line open may be a wise decision to have access to money in an emergency, such as major home repairs or a medical emergency. It can also protect you against market downturns once you retire.
In the past, many workers earned pensions with guaranteed, steady income during retirement. Today, 401(k)s and IRAs are the norm, which means your nest egg is subject to the market. Keeping a HELOC open allows you to limit damage to your nest egg during any recession because you can draw from the equity line of credit instead of your depressed investment portfolio then pay off the balance in the future when the market improves. If you’d like additional tips on how to use your home equity to your advantage, reach out to Jan Gleisner, one of the top financial planning consultants San Diego, CA, has to offer.