Let's Talk About Home Equity
Home equity is a homeowner’s interest in a home. It can increase over time if the property value increases or the mortgage loan balance is paid down. In other words, home equity is the portion of your property that you truly “own.” Home equity is typically a homeowner’s most valuable asset. This asset can be used later in life, so it’s important to understand how it works and how to use it wisely.
What is a HELOC?
Home Equity Line of Credit, or HELOC, lets the equity you’ve built in your home work harder for you. By borrowing funds against your home’s equity when you need it, a HELOC can be ideal whether you’re paying for a major expense or simply want to have quick access to emergency funds.
The Basics of Calculating Home Equity
The easiest way to understand the amount of equity in your home is to start with your home’s value and subtract what you still owe on your mortgage. For example, if you purchased your home for $300,000, and you’ve paid down $50,000 toward that amount, you have $50,000 worth of equity in your home. Now, let’s say you bought your house for $300,000 and have paid $50,000, but the value of your house has since increased to $400,000. That would mean that your equity now equals $150,000.
What Could You Do With a HELOC?
A HELOC lets you open a line of credit with your home as collateral, which can give you significant financial freedom in which you can use for almost anything. Though there are endless possibilities of how you could spend you HELOC earning, here are 4 smart ways we would recommend using your home equity line of credit for:
(1) Home Improvements
Since a home is the biggest asset that most people will ever own, the best ways to spend HELOC money are improvements to increase a home’s value. In terms of adding value to the home, many people choose to invest in renovating existing rooms or adding more usable space.
(2) Payoff Debt
Some homeowners decide to use their HELOC in order to pay off credit card debt, since credit cards and other kinds of loans have higher interest rates. However, a HELOC has a lower interest rate because the house itself is collateral, so the risks are higher.
If you’re considering using your HELOC to pay off credit card debt, you should have a long-term plan in place to ensure that you can pay it off.
Some homeowners use home equity to invest in the stock market or real estate, expecting the returns to exceed the cost of a home equity loan. 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. If you have your heart set on an affordable vacation home for your family and need a down payment, for example, a home equity loan may work for you. But if you want to invest in something riskier and hope to make more money, it’s better to look at other options.
(4) Pay Education
If you are planning on sending your child off to college soon, or are even thinking about going back yourself, a HELOC might just be a viable way to pay for the tuition costs. Since HELOC interest rates are usually fairly low, they can sometimes compare favorably to traditional college loans. Of course, it is a good idea to closely compare your options before committing to either one.