With economists predicting rising mortgage rates into 2019, it may not be the best year for buying a home. But if you already own one, it could be a good time to consider drawing on the equity. Homeowners often have an edge in a climate of rising rates because equity can be tapped while keeping the low rate of a primary mortgage. Another market dynamic in favor of home equity — how increasing home prices have outpaced wage growth over the last few years. According to the CoreLogic HomePrice Index, home prices have risen 58 percent since the housing dip of 2011, creating considerable buildup of home equity wealth for those who stayed put. In January 2019, the total tappable home equity in the U.S. was a whopping $5.9 trillion — just shy of its all-time high. Here are six smart ways to put your portion to good use — from upgrades that build more equity to debt solutions to bucket-list goals.
1. Consolidate high-interest debt.
Average credit card interest rates recently hit an all-time high of above 17 percent. The average home equity loan, however, is currently at 5.88 percent annual interest. If you have credit cards, a student loan, or other types of potentially high-interest debt, one of the best things you can do with your home equity is to consolidate these liabilities into a home equity loan with a lower interest rate. You could save money on interest, consolidate multiple monthly payments into one, and face a lower monthly payment using a Discover calculator to assist you.
2. Renovate big.
Home equity loans may be a good choice for increasing your home’s value while making it a more enjoyable place to live. But choose your projects wisely:
- Curb-appeal boosters. Invest in a new front door package, landscaping, or exterior paint. In addition to adding curb appeal, restyling your entry can also make your home more energy efficient. These upgrades also provide a great return, with front door replacements recouping 91 percent of their value.
- Kitchen or bathroom upgrades. These rooms are most likely to age the fastest—and that’s a value-killer. Kitchens recover nearly 60 percent of their investment and bathrooms provide a 70 percent when you’re ready to sell.
- Energy-efficient add-ons. Putting in insulation, double-pane windows, and high-efficiency appliances, or similar enhancements can reduce your overhead costs. Many energy-efficient upgrades also qualify for tax credits, so you can earn money back on your investment. Consult with your accountant for details and learn what’s available in your area.
3. Create more property value.
Increase the “footprint” of your home by adding additional square footage, or use the cash to create an “income property” within your home to boost its potential value. The revenue from a rental space can also reduce your overhead and help lower debt. But there can be downsides to living in your own investment property—for instance, if the income does not outweigh the expenses (i.e.; the financials don’t work) or you are not prepared to be a landlord.
4. Wipe out major or unexpected expenses.
Home equity can be a great resource if you’re using it to pay off a large amount of unexpected debt. For example, using it to handle an expensive medical-insurance claim not covered by your deductible or legal expenses can ease financial burdens and help you focus on moving forward.
5. Pay for school.
If you are a homeowner sending a child off to college or have an eye on expanding your own learning, a home equity loan can be a great way to pay. Among the benefits are lower interest rates than other types of loans, since you are using your home as collateral, and the only borrowing cap is the equity you have available (you may even be able to borrow up to 90 percent or more of your total home equity). Depending on your school of choice and the limits of federal and state lending, using your home equity for education could be a good fit.
6. Plan a once-in-a-lifetime experience.
Is your dream to hike to Mount Everest base camp? Renew your vows in Belize with 50 of your closest friends? Using home equity can be a good financial alternative to other forms of credit for trips of a lifetime or events that mark a rite of passage. In terms of borrowing, a home equity loan is a relatively inexpensive way to get cash and payback terms are usually favorable. At a certain point in your life, creating unforgettable memories and exhilarating experiences for yourself or your friends and family is worth its weight in equity.
Smart Start: Committing to a payoff plan. Now that you know some of the ways your home equity can be put to good use, before you shop for a loan you need a game plan for repaying the money you plan to borrow. These simple considerations will quickly get you on the right track:
- Design a payment plan that works for you
- Stay on top of your day-to-day finances
- Ensure you don’t borrow more money than you can easily afford
- Consider making additional payments on the principal
To find out more about the benefits of a home equity loan, explore the loan process with Discover.