How Do Homeowners Use Home Equity?
Rising residential real estate values mean an increase in home equity for American homeowners, and many are taking advantage of this fresh source of revenue. But what exactly can you do with that untapped value?
What Are The Top Reasons for Borrowing Against Home Equity?
The reasons for borrowing vary, with two of the most common being home improvement and debt consolidation. “What I am seeing is that home improvement tops that list. Second is college financing, and third is debt consolidation,” said Tom Becker, Hanscom FCU's chief lending officer.
The New York Times cited research in a 2022 article that showed that the metro Boston area had the largest share of homeowners who were considering using home equity for home improvements (54.33%). Other reasons included consolidating debt, getting money for investments, obtaining extra retirement income, and using the money for another reason.
3 Ways to Access Your Home Equity
There are generally three ways to access home equity: cash-out refinance, fixed-rate home equity loans, and home equity lines of credit.
With a cash-out refinance, you will be able to pay off your existing mortgage and get a cash payment for the remaining balance of the new loan. Payments and terms will be outlined for you by the lender and will function like any primary mortgage.
A fixed-rate home equity loan, also called a second mortgage, lets you borrow one time at a fixed rate. You will pay fixed monthly payments as outlined in the terms of your agreement. Because the loan is paid to you in one lump sum, this is a popular option for debt consolidation or a home remodeling project.
A home equity line of credit (HELOC) is a credit line established against the equity in your home, allowing you to borrow as needed. These loans typically have a variable rate. You draw against the available credit line, replenishing it as you repay it. Because funds repeatedly become available, this is a common option for recurring payments such as college tuition or medical bills.
But what do you want to use home equity for? Let’s take a closer look at some of the previously mentioned choices and other potential options for you to pursue.
Use Home Equity - For Home Improvement Projects Big And Small
The adage "if it isn’t broke, don’t fix it" doesn't always apply. Sometimes you not only need to fix it, but you also need to improve it. Home improvements can build equity in your home by increasing property values, overall comfort, and curb appeal. Although the housing market is slowing down, that doesn't mean you can't give your home an upgrade.
Does spending money help you save money? In this case, yes. Home improvements are investments that build home equity. Choosing the right home improvement project pays off when potential buyers want that same convenience and beauty. In the end, home improvements can save you a good deal of money. Here are some solid ideas for adding equity to your home.
This most obvious upkeep item both protects your home from more costly repairs due to weathering and rot and greatly improves the curb appeal of your home. By keeping a fresh coat of paint on the exterior of your home, you can avoid the time-consuming and costly need for scraping, rot repair, and other preparation work.
Kitchen Renovation Projects
Kitchens are the hub and heart of the home — and a great place to invest in home improvements. Kitchens are all about function, but you don't have to forsake form. Appliances are more efficient and stylish than ever before, so you may want to consider upgrading your refrigerator and stove. It doesn't hurt that current kitchen appliances are very energy-efficient. Therefore, you actually end up saving money and building a bit of home equity at the same time. If chosen tastefully, new flooring and windows can do wonders for your kitchen space.
Deck Builds, Repairs, or Upgrades
In most cases, building a deck adds instant equity to a home. The first impression that people get about houses is the outside appearance and decks catch immediate attention. People like the idea of enjoying their outside space, relaxing under the stars, or gathering with family and friends. Decks also have exponential landscape potential, a pleasant and attractive way to enhance your property’s appearance. Decks invite interest and are a very practical — and profitable — home improvement idea.
Preventative Home Maintenance
Preventing major catastrophes through regular home maintenance and repairs helps preserve your home’s equity and saves money, too. Roofing inspections and repairs help avert infrastructure disasters that can all but ruin your home. Making sure that shingles are properly installed and replaced are minor costs compared to a completely new roof installation. Don't neglect your HVAC systems either!
Annual furnace inspections can stave off costly furnace and heating system replacements. Have a plumber check out the plumbing to ensure smooth operation and replace pipes when necessary. Nothing runs home equity into the ground like water damage and you should not take the risk. Also, having an electrician examine the wiring in your home is a great deterrent to potential fire hazards. Any repair that protects your home from outside elements and internal dangers is a mandatory tool for safeguarding your home’s equity. It also protects your wallet. The costs of minor repairs are tiny compared to spending thousands of dollars in replacement costs.
The list goes on and on, but home improvements and other projects like these are the most popular ways to build and utilize home equity.
Should I Use Home Equity To Pay Debt?
It’s funny how it works with credit cards. You make all these little purchases that don’t seem too bad but somehow, when they are tallied up, they become monstrous in size. It never feels like you’re spending that much.
So instead of taking on multiple credit card bills, you’re thinking about consolidating your debt into one payment with a HELOC. There are many advantages to doing this — primarily, it simplifies things and usually offers a lower interest rate.
You need only manage one bill instead of many. You can put 100% of your focus on it and knock it down. Plus, a HELOC's rate can be as much as 3 to 5% lower than credit card interest — maybe even more depending on how much you borrow against your home.
But before you rush into debt consolidation, ask yourself a few questions:
- Is your debt manageable or insurmountable? Is it a case of spending a little too much at Christmas time, or is it debt that has been accumulated over years that you just can’t seem to beat down? If it seems overwhelming, consider calling the free financial counseling service BALANCE to get a professional to take an objective look at the debt and help you manage it.
- Are you really serious about getting rid of your debt? Be honest with yourself. If you’re not fully committed, a HELOC for debt consolidation will only make things worse. The last thing you want is to have a fixed payment each month while watching your credit card balances begin to grow again. If you can’t say no to the cards for a while, it’s not time to consolidate debt in a HELOC.
- Do I really want to secure my debt against my home, or is that money I know I will need later? If your future plans include home improvements or college debt, you may want to hold on to that home equity. If that is the case, a better solution may be to transfer outstanding debt to a low interest credit card.
Can I Use Home Equity To Pay For School?
The short answer is: yes! You can definitely use a home equity loan to help pay for college tuition. You will generally enjoy relatively low and fixed interest rates in addition to reducing your monthly repayments through longer loan terms. One of the best home equity plans you can utilize for school coverage is Hanscom’s 3-in-1 Advantage plan.
The 3-in-1 Advantage Plan uses your home as collateral. Depending on your home’s value, your equity in the home, and your credit score, you could have a lot of borrowing power.
Know Your Home Equity Options
The 3-in-1 Advantage Plan offers flexibility. It’s an equity line of credit, with options for fixed loans and a credit card in one handy package. You can have up to three fixed rate advances at a time, so big bills like tuition and fees can be covered in a lump sum.
Use the line of credit as often as you like, up to your limit. This is great for expenses when you're not sure how much you need. The line of credit ensures you don’t over borrow, and that you'll still have funds for unexpected expenses. Secondly, your equity becomes available again as soon as you pay down your balance.
A credit card that accesses your equity comes in handy for purchases such as books or travel expenses. This ensures a portion of your line is always ready for emergencies or items you want to pay off quickly.
Homeowners Can Use Home Equity In All Sorts of Ways
At the end of the day, you’ll have to do a bit of research and number crunching to find which home equity loans will fit best for your situation, depending on what you want to use it for. Thankfully, they can be used to cover many different aspects of your life, from home improvements, college tuition, and even retirement.
If you want to learn more about home equity loan options and other potential benefits they may offer, check out our free guide Equity Edge: Answers to Commonly Asked Questions. Consider it your homework before your home works for you.
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