5 Reasons To Take Equity Out of a Paid-Off House If You Need Money
Written by
Jordan Rosenfeld
Edited by
Jenna Klaverweiden
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Paying off a home often comes with a big breath of relief, as you no longer have to make mortgage payments every month.
However, you may still encounter big expenses — planned ones or emergencies — that could potentially require an expensive loan or credit card debt. However, a home equity line of credit (HELOC) can often provide a much lower rate and better terms.
According to Colten Claus, an associate broker with 8z Real Estate, HELOCs “are particularly appealing due to their flexibility and relatively low interest rates compared to other types of loans, like personal loans or credit cards.”
Claus and other experts explain five reasons you could consider taking equity out of a house after you’ve paid it off.
Home Improvements and Renovations
If you need to do some significant home improvement or renovations, a HELOC may be necessary, Claus said.
“Projects like kitchen remodels, adding an extra bathroom or energy-efficient upgrades not only improve the quality of living but also boost resale value,” he said.
Additionally, homes require ongoing maintenance, such as roof repairs, plumbing upgrades and even structural improvements to prevent more costly issues down the line. A HELOC can help you make this possible, Claus explained.
Debt Consolidation
Another prudent use of a HELOC is for consolidating higher-interest debts, according to Tony Mariotti, CEO of RubyHome.
Homeowners can pay off debts like credit cards or personal loans, which often have higher interest rates than a HELOC. This move can simplify finances and reduce overall monthly payments, Mariotti noted.
“By consolidating $20,000 in credit card debt from an average rate of 20% to a HELOC rate of 5%, significant savings can be achieved. It also turns multiple debt payments into one manageable monthly payment,” Mariotti said.
Consolidating multiple debts into a single payment can make managing finances easier and less stressful, Claus added.
Investment Opportunities
A wonderful use of the equity in your home is to finance the purchase of additional properties, Claus said. This can potentially increase passive income through rentals or capital gains through resale.
“Equity can also be used to invest in higher-return ventures, such as starting a business or investing in the stock market, though these carry higher risks,” Claus said.
Education Expenses
“HELOCs can be a cost-effective way to finance education for homeowners or their children, whether for college tuition, graduate school or trade certifications,” Claus said.
You could even use these funds for professional development or career advancement courses, helping to support your financial future, he said.
Legacy and Estate Planning
Some homeowners may choose to take out a HELOC to help family members with significant expenses, like down payments for their homes, wedding costs or starting a business, Claus said.
Though you will most likely not get that money back, if it accords with your values or needs, it’s probably the most affordable option versus other kinds of loans.
You can also leverage home equity for philanthropic efforts to fulfill personal legacy goals and potentially provide tax benefits, Claus said.
Considerations Before Taking Out a HELOC
While all of these reasons to take out a HELOC may seem good at the time, Claus warned that failure to make payments can risk foreclosure, since a HELOC is secured against the home.
Also, most HELOCs have variable interest rates, which means payments could increase if rates rise, he explained.
Finally, drawing on home equity can reduce the amount of equity available for future needs, Mariotti added.
“For example, those who might need access to equity for emergencies or retirement may find themselves constrained if their equity is already bound to a past HELOC,” he said.
Ultimately, it’s crucial to consider how taking out a HELOC fits into broader financial plans, particularly for retirees or those nearing retirement.
“Using home equity should always be approached with careful consideration and ideally, with advice from a financial advisor. When used thoughtfully, it can be a powerful tool for financial management and wealth building,” Claus said.
While these are all good reasons to take out a HELOC, really ask yourself whether you need to take on more debt before you take the leap. A loan is still money that you have to pay back with interest.
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