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Good uses for your home equity
If your home is worth more than what you owe on your mortgage, congratulations! You’re one of the lucky homeowners with equity. And, you have several ways to turn that equity into money that you can use for other things.
One way is to refinance your mortgage, increase the loan amount and take out the difference in cash. Another way to get a cash lump sum is to take out a second mortgage.
Or, you could get a home equity line of credit, or HELOC, which works more like a credit card, giving you a credit limit and a certain amount of time to withdraw the funds and a set amount of time to repay. If you’re 62 or older, you might consider a reverse mortgage, also known as a home equity conversion mortgage, or HECM.
Regardless of how you tap your home equity, it can give you great flexibility and provide opportunities you might not have otherwise. Here are some of the goals and dreams home equity can help you achieve.
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Finally, you can fix up your home!
One of the most popular ways to use home equity is to make repairs or improvements to your home. Just think — you won’t have to move to get the house you want! You can stay put and fulfill the vision you’ve had for your home.
Common projects homeowners choose to do include:
- Get a new roof.
- Remodel the kitchen.
- Update the bathrooms.
- Spruce up the landscaping.
- Turn the attic into a bedroom.
- Add a porch, deck, patio or sunroom.
- Finish the basement.
- Replace the windows.
- Add on a family room, bedroom or bathroom.
- Update your home’s decor.
- Upgrade to energy-efficient appliances.
You can probably recoup most of the cost of a major project if you decide to sell your home.
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Buy investment property
Home equity might be tapped to buy an investment property and use it as a vacation home for yourself or rent it out to someone else.
Rental property gives you two ways to profit:
- You can collect rent from your tenants.
- You can get a capital gain when you sell.
If the rent you collect is more than your cost to own the home, or if the price you sell it for is more than what you paid to buy it, you come out ahead.
You don’t need to have enough equity in your current home to buy your second home outright, in cash. Instead, you can use your equity as a down payment and borrow the rest.
You also can also use your equity to invest in stocks, bonds or mutual funds or to start your own business.
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Supplement your retirement savings
Many people struggle to save for retirement. You can use your home equity to close the gap and afford a more comfortable lifestyle after you stop working.
Using your equity to pay medical bills or living expenses can help you delay dipping into retirement savings and avoid paying tax penalties if you crack open those funds too early.
Use our calculator to figure out how much you need to save for retirement.
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Wipe away other debts
If you have credit card debt, student loans, or auto or personal loans, you can use your equity to pay them off. This strategy can save you money if the interest rate on your home equity financing is lower than the rate you’re paying on other debts.
Using equity to pay off other debt makes sense only if you don’t splurge with your newly zero-balanced credit cards or take out other new loans that you might not be able to afford.
Unlike other types of debt, equity loans are secured by your home. That means you could lose your house if you don’t make the payments.
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Pay for schooling
Home equity might pay for tuition and other educational expenses, saving your family from taking out student loans, personal loans or using credit cards for college costs. Home equity loans often have lower interest rates than other types of borrowing.
You can use your equity to pay for your education or your children’s education. Just be sure you aren’t putting your own financial future at risk by helping them.