Home Equity is the positive difference between what you owe on your home and the current market value of the home. Understanding home equity can be one of the most useful tools for a homeowner. One of the first things you need to know is that there is a right way and a wrong way of leveraging your home equity, this article is here to help you understand the best and worst ways to leverage home equity.
There are multiple ways to tap into the home equity that you have saved. One is to get a home equity loan, this is very similar to your standard home mortgage. It is also referred to as a second mortgage. Home equity loans are what is called instalment loans, this means that you get the full amount in one lump sum payment rather than having smaller payments that are made over a period of time. The second option for tapping into your home equity is called a cash-out refinance, this is done by refinancing your current mortgage and taking the difference between the previous mortgage payment and the new payment in cash.
If you have home equity saved up you should also know the best ways to put your home equity to use. Below are a few ideas and tips for using your home equity.
- High value improvements for your home. The improvements that you do to your home will increase the value of your home and will help you build up more equity. However, some “home improvements” can also lower the value of your home. So before you start on any improvements make sure that what you are doing will help you in the long run.
- High interest debt consolidation. Many times if you have one type of debt then most likely you have other debt as well, your home equity can be used to consolidate multiple debts into one. However, you need to make sure you understand why you have debt before consolidating it so that after you consolidate you don’t do the same thing and get more debt. If you don’t do this you could risk ending up in the exact same spot all over again.
- Emergency fund. It is considered ideal to have 6 months of savings stashed away for an emergency fund, this should include any monthly payments such as, cell phone, electric, water, ect. As well as some extra money for medical expenses should they pop up. Your home equity can be a good alternative to credit cards because the interest would be lower than a credit cards interest.
- Real estate investing. For those that understand the real estate business or those that are experience in real estate investing this can be a very good use for home equity. You can use your current homes equity to purchase another piece of property. One thing to keep in mind is that real estate can be a tricky business and buying a property to invest in does not come without risk, you could end up buying a property and if the market changes you can lose money rather than making money. Always look at the real estate market and the trends of ups and downs before investing in any property.
Now that we have talked about a few good ways to put your home equity to use, let’s go over a few ways that you should not use your home equity.
- Buying a car. This in general is not a great idea. Most people would assume it is a good idea because it a low payment on the vehicle. However, the interest rates for car loans are much higher and the typical home equity payout is quite long and you risk gathering more debt.
- Investing in the stock market. Using home equity to invest in the stock market is a very risky move. The stock market changes day to day and can crash causing you to lose all of your money and since you are using home equity you would also run the risk of losing your money and your home.
- Cover day to day expenses. Using your homes equity to pay for day to day expenses is in large more of a waste of your homes equity. When you use your home equity you want to use it to make your life or financial situation better. When you use it for your daily expenses it is most likely not being used on something to increase your money or increase the value of what you currently own.