How to Use Home Equity to Build Wealth

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Want to use your home equity to build real wealth? From funding investment properties to starting a business, we’ll cover seven smart ways to use your home equity to build long-term financial security.

 Use your equity to:

• Upgrade your home to boost value
• Add a rental unit
• Invest in property
• Consolidate debt
• Build an emergency fund
• Start a business
• Fund education

What Is Home Equity and Why Does It Matter?

Home equity is the portion of your home you truly own — the difference between your home’s market value and what you still owe on your mortgage. For example, if your home is worth $400,000 and you owe $250,000, your equity is $150,000.

As home prices rise and you pay down your loan, your equity grows — and it can be a powerful tool to build wealth, not just sit as untapped value.

1. Upgrade Your Home

Many homeowners reinvest their equity into their properties by using it to finance renovations. 

• Home makeovers can build wealth by improving the marketability and appeal of a property, attracting potential buyers and commanding a higher sale price. 
• Strategic upgrades, such as kitchen remodeling or the addition of energy-efficient features, can significantly boost a home’s value. 
• Some improvements can provide homeowners with tax deductions and credits. 

Some projects pay you back more than others. HomeGuide offers the following cost and ROI averages by project.

2. Add a Rental Unit

Transforming a part of your home into a rental space, like a basement suite or a garage apartment, can provide an additional source of 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. 

As with remodels, a home equity line of credit (HELOC) may be a better option than a home equity loan for an ongoing project with undefined costs and timelines, such as adding a rental unit. However, it’s essential to understand the differences between these common ways to tap into equity.

3. Buy an Investment Property

Some borrowers use home equity to purchase investment properties to generate rental income and realize long-term property appreciation.

“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,” says Alan Corey, real estate agent, broker and investor in the Greater Atlanta metro area.

“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,” he adds.

4. Pay Off High-Interest Debt

If you have substantial high-interest debt, you could be struggling to invest enough for your wealth-building goals and even to 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. 

5. Boost Emergency Savings

Having an emergency fund is less about building wealth and more about safeguarding it. By setting aside funds specifically for emergencies, such as job loss, medical emergencies or unexpected home repairs, you reduce the likelihood of dipping into your long-term investments and savings. 

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

6. Start a Business

Owning a profitable business is a great way to build wealth. However, the challenge of getting startup money thwarts many prospective entrepreneurs — but you can use home equity to start a business. 

Remember: Businesses are not just revenue sources — they’re also assets. When it’s time to retire, you can sell your company for a windfall.

7. Pay for Education

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 toward your wealth-building goals when you earn more. 

According to the U.S. Bureau of Labor Statistics, workers with a bachelor’s degree earn about $1,432 per week, compared to $853 for those with only a high school diploma.

Consider the following data from the Bureau of Labor Statistics.

Tips for Using Home 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 keep up with payments. Always make sure that the amount you borrow is within your ability to pay 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 is irresponsible. Also, be mindful of investing in risky ventures such as a buddy’s start-up, complicated investment products or sketchy real estate deals. It’s best to use home equity for investments that will appreciate in value over time or generate a steady 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. 

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.

If you have home equity, don’t let it sit idle. Talk to a financial advisor about how to safely turn it into a wealth-building tool for your future.

Turn Equity Into Opportunity

If you’re sitting on a pile of home equity, don’t let it collect dust. From launching a side hustle to generating rental income, learning how to use home equity to build wealth can be a game changer for your financial future.

Ready to put your equity to work? Compare HELOC vs. home equity loan options, talk to a lender and map out a plan that fits your goals.

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