Benefits of using your home equity, according to pros
Owning a home is often considered a good investment. By making your mortgage payments each month, you build value in the form of home equity, which you can cash in when you sell your home. But it can also be a cost-effective source of financing via products like home equity loans and home equity lines of credit (HELOCs).
"In the right circumstance, a home equity loan or a HELOC can be a helpful tool to have in your tool belt," says Tyler Gray, CFP, managing director at Sage Oak Financial. "For many people, their home is their largest asset, so having a way to tap into that equity without selling the property can be really appealing."
If you're considering borrowing from your home equity, it helps to know the benefits so you can make an informed decision. We spoke to some experts for their takes.
Explore your home equity options online now to see what rate you qualify for.
Tapping into your home equity provides many benefits. Here's how experts say it can help you.
"Home equity loans and HELOCs are secured loans as the equity in your home backs them," says Matt Teifke, founder and principal broker of Teifke Real Estate. "This makes them more inviting to lenders because they have a lower risk of default compared to unsecured debt such as credit cards or personal loans."
Because of this lower risk, lenders are willing to offer competitive rates for these products. "Home equity is usually one of the cheapest sources of borrowing when compared to other options such as credit cards," says Noah Damsky, CFA and principal of Marina Wealth Advisors.
For example, credit card interest rates average 20.55% presently, according to Bankrate. Current rates for home equity loans and HELOCs, on the other hand, range from 8.35% to 8.63%.
See today's top home equity rates here.
You can use a home equity loan or HELOC for anything you want. Popular uses include home improvements, debt consolidation and generating retirement income.
But there's one use you may not be familiar with that can come in handy: bridge financing.
John Boyd, CFP, lead wealth advisor at MDRN Wealth, explains, "If you're considering a move but lack immediate capital, tapping into your home equity can provide the funds you need. This option allows you to bridge the financial gap between selling your current home and purchasing a new one."
Deni Supplee, realtor and cofounder of SparkRental, points out another unique way to use your home equity: "adding an accessory dwelling unit to rent out and house hack. In fact, if you find a way to house hack and let someone else's rent cover your housing payment, they pay down your mortgage balance(s) for you. Your equity grows, and it doesn't cost you a dime."
Compare home equity offerings today to find the product that's right for you.
"Home equity loans and HELOCs grant access to substantial amounts of money, particularly for those homeowners who have diligently built equity over time," says Mike Qiu, real estate agent and owner of Good As Sold Home Buyers. "Such loans are especially useful when undertaking significant projects, like home renovations or additions, where the cost exceeds what is typically covered by personal loans or credit cards."
Lenders typically allow you to borrow up to 85% of your home equity, which can amount to hundreds of thousands of dollars. By comparison, credit card limits typically range from $1,000 to $2,500.
Find out how much you can borrow here.
Depending on how you use your home equity funds, a home equity loan or HELOC "can provide tax-advantaged borrowing compared to auto or credit card loans," says Damsky.
Specifically, if you use the funds for IRS-approved home improvements, you may qualify to deduct the interest come tax time. This is something you won't find with other common financing options.
In addition to qualifying for a tax benefit, using your home equity for home repairs and renovations can also boost your home's value.
"Home equity can serve as a valuable source of liquidity for home renovations and improvements," says Boyd. "By using your home equity wisely, you can invest in enhancing your property. This approach has the potential to increase your home's value over time, benefiting you both aesthetically and financially."
Home improvements that boost your home's value include kitchen and bathroom updates, building a new addition and updating your HVAC system.
Thinking of using your home equity? See what products you qualify for here.
While there are many benefits of using your home equity, it's a significant financial decision that should not be taken lightly.
"It's essential to exercise caution when utilizing home equity. It should not be treated as another credit card," says Boyd. "Responsible usage is crucial, as misuse can have severe consequences, including the risk of losing your home. It's important to avoid reckless behavior and approach home equity with a thoughtful and strategic mindset."
That said, by choosing the right home equity product for you and borrowing only what you need, you can get the funds you need at rates considerably lower than other financing options. When in doubt, consult a financial advisor for guidance customized to your situation.