7 Ways To Use Home Equity To Build Wealth

It’s a big deal to accumulate equity in your home. It means you’ve chosen an area where home values are appreciating and have kept your mortgage payments current.

Regardless of your home’s appreciation, it’s a reason to celebrate and take advantage of the benefits: equity. In many cases, you can tap into this equity through financial products like a home equity loan, home equity line of credit, cash-out refinance or even a reverse mortgage.

If you’re ready to use your home’s equity to start building wealth, this quick guide will help.

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Home Improvement Projects

Perhaps one of the most common uses of home equity is for home renovations. Sprucing up your home can build wealth by improving the marketability and appeal of a property, attracting potential buyers and commanding a higher sale price.

If the goal is to force appreciation, strategic upgrades, such as kitchen remodeling or the addition of energy-efficient features, can significantly boost a home’s value. Also, some improvements can provide homeowners with tax deductions, which makes this use of home equity even more attractive.

Rental Additions or Conversions

Transforming a part of your home into a rental space, such as a basement suite or a garage apartment, can provide additional income. This type of home improvement project capitalizes on your property’s existing space and can significantly boost your home’s market value. Potential buyers will usually place a premium on homes with solid prospects for extra income.

Invest in an Income Property

Using your home’s equity to purchase additional investment properties is also a very common way investors build wealth. The idea is that as the value of your rentals appreciates, you build greater wealth, while income from renters can cover the mortgage and maintenance costs, potentially leading to a profitable return on investment.

Alan Corey is a real estate agent, broker and investor in the Greater Atlanta metro area. He says, “Your home equity is always sitting idle and not being put to work to make you more money. I recommend others take my approach of putting it to work by using a HELOC on your primary to buy investment properties with 100% financing.”

He goes on to explain how he built wealth using home equity, “My HELOC serves as a 20% down payment on a rental, and I get an 80% mortgage to pay for the rest. Rental income then pays both the mortgage and HELOC payment. And once the HELOC is paid off in full, you can rinse and repeat on another property.”

Consolidate Debt

If you have a lot of high-interest debt, you could be struggling to invest enough for your wealth-building goals and even pay your basic living expenses. One way to keep interest from eating into your plans for financial independence is to consolidate your debt with your home’s equity.

Home equity loans and HELOCs can offer lower interest rates than credit cards, which can help you pay off your debts faster. Also, by combining multiple debts into one payment with a lower rate, you can reduce the amount of interest paid over time.

The money you save on interest can be used elsewhere, such as saving, investing or acquiring income-producing assets like real estate or a business.

Pad Your Emergency Savings Account

Having an emergency fund is less about building wealth directly and more about safeguarding the wealth you accumulate. By setting aside funds specifically for emergencies, such as job loss, medical emergencies or unexpected home repairs, you lessen the chance of having to dip into your long-term investments and savings.

While an emergency fund may not increase your wealth on its own, it plays an important role in wealth preservation, ensuring your financial plan remains intact and your investments continue to grow.

Invest in a Business Venture

Owning a profitable business is a great way to build wealth. However, most people’s biggest challenge is getting money to start a business. You can start a business to cover your living expenses with a home equity loan or line of credit. When it’s time to retire, you can cash out by selling it.

Cover Educational Expenses

Another great way to build wealth is to increase your income. Investing in training, education and skill development can catapult you into higher-earning positions. You can save and invest more towards your wealth-building goals when you earn more.

5 Tips for Using Your Home’s Equity Wisely

Tapping into your home’s equity can help you reach many financial goals, but if used incorrectly, it can cause you to go deeper into debt or put your primary residence at risk. Here are some tips to ensure you use your home’s equity wisely.

Avoid Overleveraging

Borrowing against your home equity can lead to overleveraging, which can put your property at risk if you can’t meet loan repayments. Always make sure that the amount you borrow is within your ability to pay it back, even if your financial circumstances change.

Dodge Short-Term Splurges and Risky Ventures

While it might be tempting, using home equity for things like vacations or dream vehicles isn’t always the best use of funds. Also, be mindful of investing in risky ventures such as a buddy’s start-up, complicated investment products or inadequate real estate deals. It’s best to use home equity for investments that will appreciate over time or generate income.

Consolidate Debt Thoughtfully

Once you consolidate debt, you could have one or more credit cards with a “clean slate” or zero balance. The temptation here could be to start using them again and carrying a balance. This causes some people to go back into debt. Put these cards away so you don’t use them only to rack up debt again.

Being Wary of Market Fluctuations

Real estate markets can be volatile, and a decline in property value could put you in a position of owing more than your home is worth. Consider market trends and your long-term plans for your home before tapping into your equity.

Know the Costs

Loans and refinances come with fees and interest. Calculate the full cost of accessing your equity, not just the immediate cash benefit, to avoid paying considerably more over the long term.

Final Take

Recognizing these risks and approaching home equity with a strategic plan can help you maintain financial health while leveraging your home’s value for wealth building. It’s about making informed decisions that align with your long-term goals, ensuring that today’s financial moves pave the way for a secure and prosperous tomorrow.

This article originally appeared on GOBankingRates.com: 7 Ways To Use Home Equity To Build Wealth