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2. Do a cash-out refinance of your current mortgage
With a cash-out refinance, you can tap into your equity and refinance your home with a larger mortgage. The lender will advance you that additional amount in cash, which you can put toward remodeling costs or other expenses or to pay off higher-interest debt, such as credit cards and car loans.
Most lenders will limit your cash-out loan amount to 80% of your home’s value. What’s nice about this route is that a cash-out refinance is a standard first mortgage loan, not a secondary lien or line of credit, allowing you to take advantage of a mortgage’s lower interest rate compared to consumer debt.
3. Use it toward your retirement
The most straightforward way to use your home equity for retirement is to downsize your home and invest the proceeds, reducing your expenses (and again building equity with another mortgage). Reverse mortgages can help supplement your retirement income while tapping into your existing home equity, but this option can make it difficult to leave your home to your children, among other risks.
4. Fund your next renovation project, consolidate debt, or pay for education
Using a home equity loan or home equity line of credit (HELOC), you can borrow money using the equity in your house as collateral for a number of expenses, including debt consolidation, tuition, renovation projects, or even a down payment on another property.
However, keep in mind that interest will only be tax-deductible if the borrowed funds are used to “buy, build, or substantially improve the taxpayer’s home that secures the loan,” according to IRS Publication 936.
Typically, you’ll need at least 10% equity in your primary home (or 20% in an investment property or second home) to qualify for a HELOC, but be careful how you spend the money. You’ll have to pay back whatever you borrow, plus interest, for this option.
The risks of dipping into your home equity
While it’s tempting to use your home equity to pay for home renovations, repairs, and other expenses, you could lose your home if you don’t repay what you’ve borrowed.
People unfortunately borrow against their house and then can’t pay it back, which makes it harder for them to sell. “A lot of people misuse the money,” Joseph says. “I know a lot of investors who do that — buy a house, refinance, buy another house … but it’s not necessarily the best route to go. Or using the money for just anything — a car, for example.”
Even without borrowing against their home equity, homeowners can wind up with “negative equity,” or owing more on the mortgage than their home is worth. People also refer to this as being “upside down” or “underwater” in their mortgage, and this can occur because of an increase in mortgage debt or a decline in home value.
If you’re considering tapping into home equity to pay off debt or expenses not associated with purchasing another property, Joseph suggests finding other ways to come up with the money or taking out a smaller amount. Having a temporary job or taking out another type of loan that addresses these expenses offers more stability than borrowing against your house.
Home equity: the long game
It’s exciting to build wealth through homeownership, but remember that owning a house over time gives you the best chance of riding out any market fluctuations and covering inevitable selling expenses so you can reap the greatest rewards.
“Real estate is a long game. It definitely, definitely pays off,” Joseph says. “Five years goes by very fast. Even 15 or 20 years. Having a house and building equity over those years, even if you just own one property, can change someone’s life.”
Header Image Source: (Alexander Wark / Unsplash)
