Home values have increased considerably in recent years, giving homeowners an avenue to tap their home’s equity to improve their overall financial picture. Here are the most common ways to spend home equity:
Home improvement. Besides making a home more comfortable for you to enjoy, upgrades could raise the home’s value and draw more interest from prospective buyers when you sell it later on.
College costs. A home equity line of credit can be a good way to fund a college education because the interest rate might be lower than that of a student loan.
Consolidate debt. A HELOC can be used to consolidate high-interest debts to a lower interest rate. Homeowners sometimes use home equity to pay off other personal debts such as a car loan or a credit card.
Emergency expenses. A recent Bankrate survey found that most Americans couldn’t cover a $1,000 emergency with their savings funds. If you suddenly find yourself in a costly situation — perhaps you’re out of work or have large medical bills — a home equity line of credit may be a smart way to stay afloat.
Longterm investments. Some homeowners use home equity to invest in the stock market or real estate. This has risks, though, because there are no guarantees the stock market will perform as well as expected. Similarly, if you use home equity to invest in real estate, you can’t be certain the investment property won’t lose its value or bring in the income needed to get a return on your investment.
Even if you use your home equity to add value to your home or to better your financial position in some other way, keep in mind that if you fail to repay a HELOC, you could lose your home to foreclosure. Run the numbers to ensure you can continue paying your regular mortgage on top of a new home equity loan — and that you have a solid plan for improving your finances with home equity money.