Home prices have increased dramatically in the past five years, per Zillow’s United States Home Prices & Values report. This is great news for anyone who already owns a home, even if you aren't interested in selling. Home owners with good credit who have built up equity are in the enviable position of sitting on a big opportunity for low-interest borrowing.
Here are some things you can do with your home equity:
The first thing you need to do is ensure you maximize the amount of money available and the way in which you are able to access it. There are two main ways to do this: a home equity loan and a home equity line of credit (HELOC). The first step is understanding the ways in which they are different. A home equity loan gives the home owner a lump sum which can be used for a single purpose, more like a traditional mortgage. A HELOC is a line of credit that remains open for a limited time (usually 10 years), and it functions more like a credit card.
A HELOC offers more flexibility and provides greater long term benefits. It gives the home owner access to the equity in their home without the need to spend it all immediately. The interest rates are typically lower than other forms of credit because the home itself is used as collateral for the debt. That means you only pay interest on the money you use and as you pay off the debt you pay less interest!
Another benefit of choosing a HELOC or a home equity loan is that the interest is tax deductible just like a primary mortgage. The amount of the interest which can be deducted varies based on the use of the money. If it is used to improve the home or for some other purpose directly related to the home, you may be able to deduct up to $1 million. If the money is used for other purchases up to $100,000 can be deducted.
When applying for a home equity loan or a HELOC, you won't use the original appraisal of the home as it has likely appreciated since it was purchased. Instead, you would procure a new appraised value of the house which would be the base amount from which your loan would be derived.
The lower interest rate and tax benefits make HELOCs an appealing way to cover the costs of higher education. Whether you are considering going back to school yourself or you want to help your child with tuition, it’s not going to be cheap.
Student loan interest rates start at around 4.45 percent but are higher for graduate loans and can be even higher still for private loans. Generally, a HELOC will have a lower interest rate. While the interest paid on a student loan is tax deductible the maximum one can deduct is $2,500, far less than what is eligible with a HELOC or home equity loan.
The advantages of a college degree or an advanced degree for you or your child are innumerable. Studies have consistently shown higher earnings for those with degrees and increased annual income for those with graduate or doctorate degrees. By financing education with the equity in your home you are minimizing the money wasted on interest and maximizing the potential for future earnings.
Consolidating high interest debt from other sources is another way to invest in yourself. By paying off debt with a HELOC, you could lower your monthly payment and save significant amounts of money paid in interest each year. Remember, credit card debt and most other forms of consumer debt are not tax deductible.
Credit card debt, existing student loan debt, medical expenses, lines of credit from individual stores, and any other high interest debt you have accrued can all be consolidated which will allow you to pay off the debt faster. Reducing the overall amount of debt you are carrying boosts your financial security, balances your income-to-debt ratio, and can also improve your credit score—all of which are important if you want to borrow more money in the future.
It can be difficult to secure the funding necessary to build a business, even if that business has low start-up costs. A HELOC can give you the freedom to take your dream to the next level.
A HELOC is ideal for this as it allows you to cover the expenses as they arise rather than anticipating what the total cost will be upfront. You know you have the financial savvy and responsibility necessary to launch your own business, the equity you've earned in your home is proof of that. A HELOC allows you to leverage that experience to create even greater financial security with your new business.
If home prices in your neighborhood have continued to rise, you owe it to yourself to explore the possibilities of tapping into the equity of your home to leverage that money in the most beneficial way possible.