You’ve probably heard your home is your most valuable asset.
You and many homeowners across the country have a lot of equity. But what does that mean, exactly? And what is it good for, in practice?
“Home equity” is the difference between the market value of your home and the amount you owe on your mortgage–i.e. subtract the amount you owe on your mortgage from your home’s current market value and, voilà, you’ve got your home equity.
Homeownership allows you to build equity over time both as you pay down your mortgage, and property values appreciate. This equity adds to your net worth. It is a valuable asset. It can offer financial security, flexibility, and opportunities for homeowners.
Because home equity isn’t a tangible thing, several products can help you use it.
These products can turn your equity into liquid cash. Traditionally, homeowners have used HELOCs, home equity loans, cash-out refinances, or reverse mortgages to harvest their equity.
By using your home equity wisely and responsibly, you can gain more benefits.
You can improve your financial well-being.
You can also build wealth. How is that? Read on to find out.
Make Home Improvements
When you make
strategic home improvements, you can increase your home’s value. And as we described above, as your home’s value goes up, so, too, does your equity. That said, the key word here is strategic--not all renovations are equal, when it comes to adding value to a home.
- Curb Appeal: A clean, well-kept exterior makes a strong first impression on buyers. It can also increase your home's value. Enhancing your home's exterior with landscaping, fresh paint, updated siding, or a new roof can meet this goal.
- Kitchen Renovation: Many people see the kitchen as the heart of the home. Buyers often view it as a key selling point. Upgrading outdated appliances, countertops, cabinets, and fixtures can modernize the space and lead to higher resale value.
- Bathroom Remodel: Renovating bathrooms can significantly increase your home's value. Updating fixtures, adding storage, replacing old tile, and upgrading the shower or bathtub can enhance both functionality and aesthetics.
- Energy Efficiency Improvements: Installing energy-efficient features, like new windows, doors, insulation, and HVAC systems, can cut utility costs. It can also raise your home's value.
- Energy-efficient homes are in high demand. Buyers want lower energy bills. Many also want a smaller environmental footprint.
- Home Expansion or Addition: Adding space to your home with an expansion or addition can raise its value.
- Examples include a new bedroom, bathroom, or living area. Additional square footage can improve functionality and accommodate growing families.
- Basement or Attic Conversion: Finishing an unfinished basement or attic can add valuable living space to your home. Converting these areas into bedrooms, recreational rooms, or home offices can significantly increase your home's usable square footage.
- Maintenance and Repairs: Fixing overdue maintenance and needed repairs keep your home's value. It also helps prevent value loss over time. Don’t ignore regular maintenance, such as roof repairs, HVAC servicing, and exterior painting.
Consolidate Debt
High-interest debt can hinder wealth-building in several ways. Such debt can eat into your income and consume a significant portion of your monthly budget. Think of it like this: the more money you spend on interest payments, the less you have available to spend otherwise. The strain on your monthly cash flow makes it hard to pay for essentials, save for emergencies, or invest to build wealth.
Using home equity to consolidate debt can free up money and improve your financial health.
- Lower Interest Rates: Credit cards, personal loans, and other forms of unsecured debt often have the highest interest rates. By rolling high-interest debt into one lower-interest loan, you can lower borrowing costs and save on interest over time.
- Single Monthly Payment: Combine several debts into one loan. This simplifies your monthly budget and makes debt easier to manage. Instead of juggling payments with different due dates and interest rates, you will make one payment each month. This makes budgeting easier and lowers the risk of missed payments.
- Extended Repayment Terms: Home equity financing solutions frequently have longer repayment terms than unsecured loans or credit card debt. By extending the repayment period, you can lower your monthly payments and improve your cash flow. This can make it easier to manage your debt and meet your financial obligations.
Pay Off College Tuition
Pursuing higher education isn’t cheap. But education and the development of new skills can lead to future income growth in several ways.
Home equity financing can help pay tuition for education programs like college, university, vocational school, or trade school.
They can also fund advanced degrees, like master’s or doctoral programs, that build specialized knowledge in a field. Generally, earning an advanced degree can improve your qualifications.
It can raise your earning potential. It can also prepare you for leadership roles. It may help you get higher-paying jobs in your industry.
However, investing in education can raise future income and support career growth.
Still, you should weigh the likely return and make sure benefits exceed borrowing costs. Most importantly, explore other ways to pay first. Consider scholarships, grants, employer tuition help, or personal savings. Use home equity financing only after you review these options.
Advance Your Career
If you have a business idea or venture you want to pursue, using your home equity can help. It can provide the startup money you need. These funds can cover startup costs. Examples include buying equipment, leasing office space, hiring employees, or funding marketing efforts.
In addition, if you already own a business and want to expand, your home equity can provide funds to grow. Whether you are opening a new location, home equity financing can help you grow your business.
It can also help if you are launching a new product line.
Buy More Real Estate
You can also use your home equity to fund the down payment on another property.
Buy it on purpose as an investment opportunity. Investment properties can:
- provide a steady stream of passive income from the rental payments from tenants
- diversify your income streams and balance out the volatility of other investments, such as stocks or bonds
- furnish financial stability by supplementing retirement savings and otherwise compounding your wealth over the long term via additional investments
Diversify Your Investment Portfolio
We’ve all heard the old adage not to “put all your eggs in one basket.” That advice holds true for investments–it’s best to spread them out between different asset classes to decrease the risk. If you tap into your home equity, a financial advisor can help you pick mutual funds and bonds. They can also suggest other investments to diversify your portfolio.
Build Your Emergency Fund
Your savings are there for the future–whether in case of an emergency, or to set you up in your retirement. Retirement savings help you keep your standard of living after you stop working. They can also cover healthcare costs, which often rise later in life. Plus, to perform any renovations to
age in place, or put down a downpayment in efforts to downsize, these savings can be indispensable. Lastly, retirement can be your next great act in life’s grand play. With enough financial resources, you can enjoy it fully. You can also pursue activities that bring joy and fulfillment.
How Unison Can Help You Build Wealth
One of the most popular ways to use your home equity to meet these goals is a home equity loan product. One example is a home equity line of credit.
These traditional options did let homeowners use their equity, but they came with steep interest rates. They also had steep monthly payments that often left borrowers with little financial flexibility. Enter Unison.
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