If you’re a homeowner who’s faithfully been making your mortgage payment, then chances are good that you have built up equity. Equity is the difference between your home’s value and what you owe on it. As a financial benefit, you can borrow against it, up to 80 percent of your home’s value.
Two of the more common ways to use that equity is through a home equity loan, or line of credit — commonly called a HELOC. Each product has advantages and disadvantages, but they both allow you to use the equity that you’ve spent so much time building.
Debt Consolidation and Refinancing
One use for your equity is to consolidate other debt. Whether you’re paying down credit cards, student loans, car loans, or even medical bills, you could take out a home equity product to pay those off as an alternative to traditional options.
By consolidating your debt, you’ll have only one monthly payment. Home equity products often have low interest rates, so you’ll save money in the long run. Consolidating your debt can also help your credit rating. Being able to better manage your debt obligations should have a positive impact on your credit in the long run.
The downside to using equity to consolidate debt is that your home is on the line because the loan or line of credit is secured by your residence. If you use the loan to pay off your credit cards, for example, and then continue to use the cards, you could get into financial trouble by accumulating more debt. If you’re unable to make that payment, the bank could foreclose on your home.
Investing in a Second Property
If you’ve been looking at a second home for investment purposes, funds from a home equity loan could pay for a down payment or pay for closing costs. If you plan to flip the house or need to put in any appliances before renting it out, you could use a HELOC instead to cover those costs. This is especially helpful to business owners who own multiple properties.
If you rent out your new investment property, you can use the rent income to help you pay back the loan. Keep in mind, however, that the chances of your rental income may not cover the entire loan payment. In that case, you’ll need to make sure you can afford any leftover payment that is due.
Paying for a Home Improvement Project
You can use equity products to pay for remodeling and improvements in your primary residence. In fact, most home equity products are used for that purpose. You can often also deduct interest paid on the loans from your taxes. Talk to your tax professional or accountant to find out if you’re eligible.
In this case, it’s sometimes best to get a HELOC instead of a home equity loan. The line of credit allows you to only take out the amount you need, when you need it. Most HELOCs have a draw period of up to 10 years, during which you can withdraw money and pay it back like a credit card. So you can complete big projects in stages instead of taking out one lump sum loan.
In addition, many home improvement projects end up costing more than anticipated. If you’ve taken out a traditional loan and run out of money, you might not be able to finish in a timely manner as you would with an accessible line of credit.
Paying for a Medical/Financial Emergency
Regardless of how good your health insurance is, or how much you’ve saved, unexpected and expensive events do happen. If you or a member of your family have a medical emergency, it can help to utilize your equity to pay for the emergency. Whether you need to suddenly come up with final expenses for a family member or need to help pay for treatments and procedures, a home equity line of credit can help.
The downside, however, is that in a true emergency, a line of credit may not be helpful if you don’t already have it set up. Getting approved for a HELOC can take several days or even weeks. So, when time is of the essence, a traditional equity product may not be the best choice.
Instead of you or your college student taking out an educational loan — or if you’ve already exhausted those options — you could look into funding part of their education with a home equity loan or line of credit. The low interest rate makes it an attractive option. Before doing that, however, make sure you’ve explored other options, such as federal grants and loans.
The Bottom Line
Home equity can provide homeowners with a valuable financial resource on the road to financial freedom. From funding a new property to paying for education, this financial resource has a variety of uses. No matter how you plan to use your home equity, compare different products and lenders to find the right solution for you.
Andrew Rombach is a Content Associate over a LendEDU - a consumer education site and online financial product marketplace. Andrew recently graduated from college in 2016 and has since worked in content management with LendEDU while writing about anything and everything finance.