What’s the Best Way to Use Your Home Equity?

home equityThe many weekends you spent doing yard work until dark or the hours spent ripping down an entire room covered with wallpaper is paying off. Sweat equity has become home equity and this financial resource can be used in many ways. Experts at Unison explain why:

“If you’ve owned your own home for a number of years, you probably have built up equity in the home. In other words, your loan balance is only a small fraction of the value of the home. That presents an opportunity: you can use your home equity to pursue other financial goals through a home equity loan or HELOC.”

The question is: What’s the best way to spend that money? There are many options to consider, and realistically, there’s not one “best” way to spend it, according to Mark P. Cussen, CFP®, CMFC, AFC with Investopedia. Cussen says:

“The best form of tapping into your home equity probably depends on more on what you will need the money for than anything else. Of course, your credit score and financial situation matter too, but that will be a factor regardless of which option you choose.”

Consider the many ways you can use that new-found money and what’s best for your current needs.

Renovate Your Home

Why it’s the best: The more money you put into your home, the more its value increases.

Home renovations are expensive, especially when re-doing an entire space like your kitchen or bathroom. These projects, however, can add a lot of value to your home, and in most cases you can get that money back—and then some—when you sell it down the line. That’s why this is a great way to spend your home equity.

To make the most of your funds in this scenario, choose renovations that drive the greatest ROI. The top three projects include insulating the attic with fiberglass, replacing your front door with a steel door and installing manufactured stone veneer.

Use the HomeZada app to track all home upgrades. The app tracks and displays your current home value, while giving a 3-year forecast. You’ll also have access to an easy-to-use mortgage calculator, along with a full amortization schedule of both your primary and any secondary loans.

Big Purchases

Why it’s the best: Invest in a big-ticket item that you’d otherwise need another loan for.

Making big purchases is another popular way to use your home equity, allowing you to invest in something that you’ll use for many years to come. While some homeowners might choose to buy a car, others use this home equity to upgrade to energy-efficiency appliances. The latter of which is a great way to save money in the long run, and something you can take with you to a new home as well. Consider the depreciation of the item you purchase to be sure you’re making a sound investment that will pay off.

Cash-Out Refinance

Why it’s the best: You have access to the cash right away and can improve your credit score.

This home equity option is a great way to pay off big loans with high insurance rates quickly: “This is usually a good idea if you have accumulated substantial equity in your residence and need cash now, but also qualify to get a better rate than on your first mortgage,” says Cussen.

He continues, “For example, if your credit score is now much higher than it was when you purchased your home, then a lower rate can help offset the higher payment that will come with the new larger loan balance that includes the cash-out amount.”

Cussen suggests that in the end, you have an opportunity to improve your overall financial situation substantially: “If you use the cash-out amount to pay off other debts such as car loans or credit cards, then your overall cash flow may still improve—and your score may rise enough again to warrant another refinance in the future.”

Using Your Home Equity

There are many other ways to spend your home equity, like financing yours or a child’s college education, or investing in the stock market. However, it’s important to remember that in the event that you lose a lot of the money invested, or can’t make payments on a large student loan, you put your home at risk.

When determining the best use of your home equity consider what you can afford, the overall risk factor, and take advice from personal finance experts. It would be wise to sit with a financial advisor to choose the best option for your needs and current financial status. When you make the right choice, your home equity can work for you—and pay you back in spades down the line.

About Author: Jessica Thiefels has been writing for more than 10 years and has five years of experience in the marketing world. She is currently a lifestyle blogger and has been featured Homes.com, Tripping.com and LifeHack.org. Follow her on Twitter @Jlsander07.