When many people contemplate the question, “Should I rent or buy a house?” one of the reasons to buy is that you’ll be building equity in your home. When you rent, those monthly payments aren’t an investment.
Home equity can be the most valuable asset for many homeowners. It’s the portion of the balance on your home loan that you’ve paid off. In other words, it’s your home’s appraised value minus the balance on your mortgage. In most cases, this takes time, with equity built as you pay down the balance and/or make improvements to your home.
When you have home equity, it can be used to borrow money through a home equity line of credit (HELOC) or a home equity loan. While there are many things you can do with that cash, these examples are some of the smartest financially.
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Improve Your Home
Putting the money back into your home by making upgrades and renovations makes sense, as you’ll be increasing its value. The more your home is worth, the greater the profit will be when it comes time to sell. You might update one of the most important rooms in the house, like the kitchen, using popular higher-end materials such as installing granite countertops.
Adding a second floor or expanding the overall square footage another way is likely to boost the value of your home significantly. You might also use it to pay for updates that would help you sell your home faster at a higher price.
A Big Purchase
For big purchases like investing in your education or your child’s, paying for a wedding, or a once-in-a-lifetime trip, it probably makes more sense to take out a home equity loan or line of credit than to use a credit card with a higher interest rate.
Using the equity built in your primary residence to make a down payment on a vacation home can make good financial sense too. It can pay off over time by appreciating in value over the years, or you might rent it to others when you’re not using it for extra income.
Consolidating Debt
If you have a lot of debt with high-interest rates, such as credit card debt and student loans, using the equity in your home to consolidate can make good financial sense. The lower interest rate can add up to big savings, as NerdWallet explains.
When considering debt consolidation, be sure to talk to a professional to make the best decision for your situation and compare all of your options.
Also read: Did You Just Sell Your First House? The Next Steps a Good Real Estate Agent Should Take
More Cash Flow for Retirement
If you’re approaching retirement or you’re already retired, using your home’s equality can be a good idea for unlocking cash flow. You could use it to embark on a second (or third) career, cover a downturn in the stock market, or invest in a rental property to increase your income.
As you age, your physical needs may change too. A home equity loan or line of credit could help make your home more accessible, such as adding accessibility ramps.
