How to make the most of your home equity — outside the home
Home equity isn’t just for home upgrades. Learn how to use it to manage debt, contribute to a college fund and more.
Key takeaways:
- Home prices have increased over the past few years, meaning homeowners have built up home equity faster than ever.
- Tapping into your home equity can be a great way to pay down higher-interest debts and reach a range of other financial goals.
A mortgage expert or financial advisor can help you create a plan for your home equity to minimize risk and maximize rewards.
It’s a good time to be a homeowner. Even if you recently purchased your home, rising housing prices have helped you build equity in your home — and you may have more than you think.
Three in five mortgage holders have at least $100,000 in tappable equity — funds that could be made available with a home equity loan or line of credit. And 4.6 million mortgage holders may have access to $500,000 or more.
“As your home builds equity, it becomes a powerful tool that can help you reach your financial goals,” says Mitchell Liuzzo, mortgage specialist at Northwest Bank. “And while many of our clients use home equity to fund upgrades to the home, like renovations and additions, it can do so much more.”
Here, we’ll share the many ways home equity can help you create the future you want, plus tips on how to use it wisely to maintain your financial health.
Using home equity to manage your debt
The beauty of home equity is that you can use it for any financial goal. However, Liuzzo notes that it can be especially helpful for homeowners looking to pay down personal debts, such as personal loans or credit card balances.
“U.S. consumers have over a trillion dollars in credit card debt, collectively. And most of this debt is at very high interest rates — sometimes as high as 30%,” he explains. “At those rates, you’ll be making payments for years and end up paying what you owe multiple times over in interest as you repay the debt.”
A home equity loan or home equity line of credit (HELOC), on the other hand, often allows you to access credit at a fraction of the cost of a credit card and likely at a lower rate than you could secure with a personal loan. So homeowners can leverage their home equity to pay down high-interest debts, consolidating them into one lower-interest payment, making it easier to pay off.
If you’re struggling with your current debt payments, consolidating them may allow you to reduce your monthly payment while still working toward your goal of living debt-free. And if you’re able to continue making the same payment you are now, consolidation can help you pay off your debts faster, saving money on interest along the way.
Here’s how debt consolidation might look in practice
Option 1: Make a lower monthly payment
Option 2: Make a comparable monthly payment
Tapping into home equity for other financial goals
Generally, Liuzzo recommends using your home equity for goals that provide a long-term return on investment, such as a renovation that increases the home’s resale value or debt consolidation that saves money on interest.
However, he notes that leveraging your home equity may make sense in several other financial situations.
“We’re seeing a lot of older folks tap into their home equity to help their kids or grandchildren pay for college,” Liuzzo notes. Others use their home equity to help launch a business or to invest in the stock market, he adds.
How to use your home equity wisely
No matter your goal, Liuzzo recommends reflecting on the following to make the right choice for you.
Weigh the risks and rewards
While your home equity is a powerful financial tool, it can also be risky to use your home as collateral to access money. “You generally wouldn’t want to use most of your home equity to go all in on a business, for example,” says Liuzzo. “If the business fails, and you can’t pay the money back, you risk losing your home.”
Think long-term before tapping into your home equity, he advises, to ensure you’re using it to create the future you want.
Determine whether a home equity loan or HELOC better suits your goal
Many homeowners have access to both options to tap into their equity, but one may be more suited to your goals than the other.
Those looking to manage their debt, in particular, should consider using a home equity loan to pay down their debt, he notes. “The structure of a home equity loan helps keep your repayment goals on track. With a HELOC, there’s a risk that you may spend more than you intended during the draw period, leaving you with more debt later on.”
Get support creating your plan
Tapping into your home equity can feel daunting, but your banker can offer peace of mind. Consider reaching out to a financial advisor or mortgage specialist to better understand your options and to talk through the best way to leverage your home equity to reach your goals.
At Northwest Bank, our dedicated team of mortgage experts is here to help. Call our mortgage helpline at 1-888-884-4626 to speak to a mortgage specialist, or visit a financial center near you.
