Using your home equity to build wealth can seem like an enticing prospect at first—after all, it’s yours! But this approach comes with risks and advantages you should consider before you dive in head-first. Here are six ways to use your home equity to build wealth so you can avoid some of the pitfalls and experience the benefits of leveraging your real estate investments.
When you refinance, you’re essentially taking out a new loan to pay off your old one. This can be a great way to leverage your home equity to build wealth. If you can get a lower interest rate, you’ll save money on your monthly mortgage payments.
Plus, if you refinance for a shorter loan term, you’ll build equity in your home more quickly. And if you have enough equity, you could even cash out some of it and use the money for other investments, like real estate.
2) Buy an investment property
Leveraging your home equity to purchase an investment property can be a great way to build wealth. When you purchase an investment property, you’re essentially using your home equity as collateral for the loan. It’s a great way to get started in real estate investing, but it’s important to do your homework first.
You’ll want to make sure you’re buying a property that will appreciate in value and that, with the help of a tenant paying you rent, you can afford the monthly payments. Remember, you’re buying a property with the goal of selling it at a higher price down the road. Real estate generally provides stable returns over time and there is less fluctuation in value than traditional stocks or bonds.
One way to use your home equity to build wealth is by renovating your home. By increasing the value of your home, you can increase the amount of equity you have in it.
Renovation can be a great way to make some extra money, especially if you plan on selling your home in the future. Just be sure to consult with your Realtor regarding the best ways to maximize your investment. What upgrades are most important? What materials should you use? What styles are most popular with buyers? Lastly, when it comes time to sell, remember that one of the best ways to get top dollar for your property is by staging the interior.
Another option for using your home equity to build wealth is downsizing. When you own a home, it can be tempting to live large and take on a mortgage that’s bigger than you can handle. But by downsizing to a smaller home, you can free up some cash that can be used to invest or save.
A smaller home will likely have a lower mortgage payment, which can help you free up some extra cash each month. The money from the sale of your current home could then be invested in stocks, bonds, investment properties, or other assets with higher potential returns than paying off a mortgage with an interest rate of 4%.
5) Pay off credit card debt
One way to use your home equity to build wealth is by using it to pay off high-interest debt, like credit cards. This can be a great way to save money in the long run and improve your financial situation.
Here’s how it works: let’s say you have $10,000 in credit card debt with an interest rate of 18%. If you were to pay it off over five years, you would end up paying $13,000 in interest alone! But, if you used your home equity to pay off the debt, you could potentially save yourself a lot of money in interest payments. Let’s assume that you own a house worth $300,000 and have a 20% down payment (that means your mortgage balance on this property is $240,000). It’s possible you could borrow up to 80% of the value of your home for other purposes.
Rather than paying this debt off at an 18% interest rate, if you borrow from your home equity, your rate could be around 6%, saving you thousands of dollars over time. You will still owe some interest charges on top of that at 6%, but they will be substantially less than what they would have been had you not taken out this second loan. Remember, if you’re using your home equity to pay off credit card debt, make sure you cut up those cards to keep yourself from charging them back up again.
6) Invest in Retirement
Your home is most likely your biggest asset so it makes sense to leverage it for retirement. You can take out loans from the equity of your house and invest it in stocks or bonds. You will have to pay interest on the money you borrow, but with some smart investments, you’ll have a steady stream of income coming in that should cover those payments and make them worth it. Be sure to speak with a qualified financial planner to help.
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