Most homeowners gained significant amounts of equity last year.
In fact, thanks to 2021’s red-hot housing market, the average homeowner saw a 31% uptick in equity between the third quarter of 2020 and the third quarter of 2021 — an increase of nearly $57,000 each.
While that’s certainly great news for owners planning to sell in the near future, it also comes with some pretty unique financial opportunities as well.
Did your home’s value skyrocket last year? Not sure how to capitalize on that growing equity? Here are four of the most financially-savvy ways to use it:
1. Improve or renovate your house.
Renovations can be one of the smartest home equity uses around — that is, with a few caveats.
First, they need to be the right renovations. Not all renovations will add value (and some could even hurt it), so make sure you choose your projects carefully. If you’re not sure where to focus your efforts, Remodeling Magazine’s Cost vs. Value Report is a good place to start.
Additionally, if you’re using a home equity loan or HELOC to pay for those renovations, you will want to be sure you’re only using the funds toward your house — and only that. Doing this will allow you to write off any interest you spend on the loan, thus reducing your taxable income.
2. Purchase a real estate investment.
Home equity is also a great choice if you’re looking to buy more real estate. In most cases, mortgages for second homes, investment properties, and homes you plan to rent out are going to come with higher interest rates, meaning larger monthly payments and more money spent over time.
Home equity loans, on the other hand, will usually come with lower interest rates, so if you can take out enough to cover your full investment in cash, you’ll save a good amount of money over time. Even better? You might even get a lower price tag. (All-cash offers typically get around a 12% discount, according to studies).
3. Consolidate debts.
Home equity loans have pretty low rates — especially when compared to other financing products like credit cards and personal loans. According to Bankrate, the average home equity loan rate was around 6% in January 2022. Credit card rates? Those sat closer to 16%.
Because of this disparity, it’s almost always smart to put your home equity toward these higher interest debts — particularly if you have several of them. You’d simply take out a home equity loan and then use those funds to pay off your debts, essentially rolling them into one single loan balance.
A nice bonus is that this streamlnes repayment. Rather than having numerous payments due each month — all with different pay dates — you have a single payment that covers all of them. This can make it easier to stay on track and make headway on your balances.
4. Toward an emergency expense.
If you come up on an emergency — say, unexpected medical bills, a totaled car, or some other large expense you don’t have the savings to handle, home equity might be a good option to consider.
As we covered earlier, home equity loans come with pretty affordable rates, so if your other choices would be putting those costs on a credit card, taking out a loan, or risking collections due to nonpayment, you’re probably better off using a low-cost equity loan instead.
The right financing option at the right time
Home equity can be a powerful tool when used at the right time and for the right purpose. Are you considering tapping yours? Get in touch today to discuss your goals and options.
Park Cities Mortgage is an Equal Housing Opportunity lender. Sponsored by NTFN, Inc. 5950 Sherry Lane, Suite 230, Dallas, TX 75225 | NTFN NMLS 75333.