How can you smartly use your home equity?

How can you smartly use your home equity?

If you belong to a middle class family and you feel you do not have enough cash, think again. You might be richer than you think. Specially if you happen to have owned a house for some time now. Home equity, or the property value over and above how much you owe for the property can be a useful financial tool is used smartly.

Smart use of home equity would essentially be using home equity loans to finance your other expenses. While on one hand it has the power to give you the chance to live your dreams, on the other hand, it is also slightly risky if not handled well. For example, if you use the money and blow it up on world travel, then you basically would remain in debt without having anything concrete to show. Home equity loans should be used as capital with a disciplined and committed approach towards how you use it.

If you are looking to put your home equity to good use, here goes the top 5 options for you to choose from:

Home equity for buying something expensive

If you are on the verge of making an expensive purchase, like buying a new car, using home equity to pay for it is a smart move since home equity loans would charge lower interest than your car loan. Also, interest payments are usually tax exempted. The only thing you need to be careful about is the loan repayment period. While a car loan usually lasts for about 5-7 years, home equity loans can be extended upto 10 years. So if you are getting into this mode plan in a way in which you can pay them off otherwise you will end up paying a large amount as the interest.

Home equity to finance an investment

Home equity can be useful if there’s a sudden investment opportunity that you badly want to pounce on. Sudden investment opportunities or deals that one otherwise wouldn’t be able to get into can be made possible with the home equity line of credit. However, caution must be there to not invest such sums in stocks and bonds.

Home improvement

Home equity can be very well used for home renovations or property upgrades since it calls for an opportunity to get higher ROI. However, while home up gradations increases the value of a house, but you should be cautious against financing home renovations for only financial gain since homeowners usually can never really recoup the full cost. So the equity is used only for home renovation that offers longer and better use of the property. For example making it better accessible from the road for your old age or adding extra rooms for children etc are smarter use of home equity.

Long term care expenses

For middle class families who are cash-poor but property-rich, and with aging people in the house, home equity can be used for long term care. However, another alternate option in this case would be to sell the property and move to a smaller place instead.

Recession saviour

Lastly, having a home equity line of credit reduces the damage during financial recession or market downturns. So instead of drawing down a low portfolio, one can use money from home equity like any other investments. Having a line of credit open helps if you need to access cash immediately.

To conclude it can be safely said that home equity is a useful financial tool that you have up your sleeves. You may use it smartly if you need it, but you don’t have to otherwise.