As home prices have soared, many homeowners have seen a welcome boost to the value of their home equity. If you have significant equity, this could be a great financial resource.
Your home equity is the difference between your home’s appraised value and the remaining balance on your mortgage. It’s the portion of your home that you own.
The good news is that you don’t have to sell your home to take advantage of your equity. If you have enough equity and meet lenders’ borrowing requirements, you can use your home as collateral to access cost-effective financing for a variety of needs.
Smart Ways to Use Home Equity
Because home equity financing borrows against your home, it’s crucial to spend the money wisely. It’s best to use your equity in ways that add long-term value to your home or life. Here’s what many homeowners have done.
1. Consolidate High-Interest Debt
In 2021, Americans were paying an average of 16.45% in interest on unpaid credit card balances. That adds up fast.If you have higher-interest debt like credit cards or personal loans, paying them off with your home equity could help you secure a lower rate and save money on your payments.
Loan consolidation also streamlines your finances by combining multiple debts into one simple payment.
Consider this first: Make sure you feel comfortable replacing unsecured debt with home equity financing, which uses your home as collateral. If you fall behind on payments, this can put your home at risk.
2. Cover Emergencies
Life happens. Maybe you need to pay for expensive car repairs or a medical bill. In some cases, your home equity can be a safety net that helps you avoid wiping out your savings account.
If you want to stay prepared for surprise expenses, a home equity line of credit lets you borrow money as needed without accruing high-interest credit card balances.
Consider this first: Home equity financing can be useful in a pinch, but it will take some time to secure this financing (if you qualify), unless you’ve already opened a home equity line of credit. Also, you should always have a plan for paying back money you borrow.
3. Make Home Improvements
Home equity can provide one of the most cost-effective ways to pay for big-ticket projects like a new addition or a kitchen or bathroom renovation. Along with giving you a better quality of life, one of these upgrades can boost your home’s future resale value, making it an attractive investment for many people.
Consider this first: Are you planning a single project or a series of home improvements? Your time frame and number of expenses may determine whether it makes sense to choose a closed-end loan or a line of credit (more on that in a minute).
4. Pay Tuition
Higher education can lead to brighter career prospects. But tuition costs keep climbing. In 2021, undergraduate tuition for full-time students at a private four-year university cost nearly $40,000.
While student loans and savings are more common ways to pay for college, home equity can be used for this purpose as well, especially to fill in gaps left over after exhausting other funding sources. In some cases, it may provide a better interest rate compared to student loans.
Consider this first: As mentioned above, make sure you’re comfortable using secured financing for this purpose. Unlike home equity financing, student loans are not tied to any collateral. As mentioned above, make sure you’re comfortable using secured financing for this purpose. Unlike home equity financing, student loans are not tied to any collateral.
5. Pay for a Wedding
Getting married is a big milestone that often has a big price tag. In 2021, the average Texas wedding cost around $26,000, not including the rings.
If you’re paying for a wedding or other large event, whether for yourself or your child, home equity financing may offer more reasonable interest rates compared to an unsecured loan.
Consider this first: If you think a wedding will strain your budget, consider scaling back your plans or asking family members to pitch in with financial contributions in lieu of gifts.
How Do You Tap Your Home Equity?
There are three main financing options. The first is a home equity loan, which provides your money in a lump sum at closing, along with a fixed interest rate and more predictable payments.
Many borrowers choose a home equity line of credit (HELOC) for more flexibility. With this line of credit, they can tap their equity more than once to cover new needs as they arise.
Finally, there’s cash-out refinancing. With this type of refinancing, you pay off your current mortgage with a new loan that is greater than the amount you currently owe on your home. You get the difference in cash.
Learn more about these three options here.
Get Started on Your Plans
When used wisely, your home equity can be used to bring big goals within reach. Amegy’s team is here to support you every step of the way. Connect with your local branch to learn more.