High interest rates. Price rise. Reducing savings. It continues to put the economic safety of many Americans at risk. It didn’t help that borrowing was not this expensive in 20 years. It is also difficult to obtain funds and credit to insult an injury. According to Bankrate’s credit denial survey, nearly half (48%) of Americans who applied for loans or financial products between December 2023 and December 2024 were denied.
But still, with high mortgage rates and near-record home prices, if you own a home, there’s a silver lining. The rise in property values may have resulted in an increase in your household (or fully owned shares). You can meet new costs or resolve old costs against its fairness.
For homeowners who require cash, there are eight reasons to use Home Equity Loans and Home Equity Credit (HELOCS). In both cases, we focused on the advantages and disadvantages.
What is Home Equity? Why should I use it?
Home equity is the difference between the value of your home and how much you still owe your mortgage. As you pay off your mortgage and the value of your home increases, your stock will increase.
If you just close your home and need cash, you can usually take advantage of the fairness of your home right away. However, some lenders require borrowers to wait several months before applying for a home equity loan or HELOC. You must also meet the lender’s eligibility requirements, whether or not there is a waiting period. These include minimum credit scores, income verification, and maximum debt coverage (DTI) ratio. Most importantly, some lenders accept 15%, but you need at least 20% of your home to qualify.
What are the different ways you can access home equity?
There are a few common ways that most homeowners can access home equity.
There are a few common ways that most homeowners can access home equity.
- Home Equity Loan: A home equity loan is a type of mortgage where you pay a lump sum payment and regularly repay the loan term, usually at a fixed rate.
- Home Equity Credit Line (HELOC): HELOC is a revolving line that is very similar to a credit card and comes with a variable rate. You can borrow, repay and reuse funds as needed during the set draw period, if necessary, and repay your balance during the repayment period.
8 Reasons to Use Home Equity Loans/HELOC
There are no limits to how you can use stocks in your home, but there are a few ways to make the most of your home equity loan or HELOC. Here are eight ways to use your home and their advantages and disadvantages.
1. House improvement
Home improvement is one of the most common reasons why homeowners will take out their home equity loan or HELOCS. In addition to making your home more comfortable, upgrades can be more valuable.
“Home equity is a great option for funding large projects like kitchen renovations that will increase the value of your home over time,” says Glenn Brunker, president of online lender Ally Home. “In many cases, these investments will pay themselves by increasing the value of the home.”
Another reason to consider a home equity loan or HELOC for renovations: Assuming you itemize your tax return deduction, you can deduct the interest paid on the loan.
2. Educational expenses
Home Equity Loans or HELOCs can help you fund higher and continuing education, whether you, your child, or other loved ones. However, this route usually only makes sense if it is lower than the student loan fee. That doesn’t happen frequently, especially with federal loans, but it may be the case with private loans.
Also, consider the type of education you are funding. For example, those with educational certification may be able to cover costs by their future employers. Some public service professionals are eligible for student loan forgiveness after a certain period of time. In these cases, it is not wise to place your home on the line with a stock loan.
3. Debt settlement
American credit card debt is rising sharply. According to Bankrate’s credit card debt survey, 48% of credit card holders currently hold balances per month. Considering that the average interest rate on your card is 20.09%, paying off that debt is not to mention the cost.
Heloc or Home Equity Loan can be used to repay plastic along with other high profit loans. “This is a very popular use of home equity, as it often allows you to consolidate debt at a much lower rate over the long term, and reduce monthly costs significantly.”
According to Bankrate’s Home Equity Insights Survey, 30% of US homeowners believe debt consolidation is a good reason to leverage home equity.
4. Emergency costs
Many financial experts agree that they need to have an emergency fund to cover three to six months of living expenses, but that’s not the reality for many people. Half of Americans (56%) save less than three months of expenses or have no emergency savings at all. If you find yourself in a costly situation – maybe you are facing massive medical expenses or unexpected home repairs – Home Equity Loans or HELOCs are one way to float.
However, if you have a plan for how to pay off your debt, this is just a viable option. Knowing that you have access to your home capital in an emergency may make you feel better, but setting up and starting to contribute to an emergency fund remains wise and economically meaningful. Additionally, the application process for Heloc or Home Equity Loan takes time (but it’s been speeding up these days. In a real emergency when you need fast cash, you’ll already have to set up a loan to use it.
5. Business expenses
Some business owners use home equity to start or grow their company. If you need capital, instead of getting a business loan, you may be able to save interest money by pulling stocks from your home. However, before committing, run the numbers. No return on investment is guaranteed and you have your home on the line.
6. Investment opportunities
You can also use your home equity to invest in the stock market and buy rental property. The right borrower may be able to take away his home equity loans even on the investment property he owns.
However, take into consideration the cost of your home equity borrowing. The HELOC rate has dropped to a two-year low, but they are still over 8%, and are by no means a bargain. To generate meaningful returns, you need to find an investment that beats that 8% mark.
7. Retirement income
If you’re running out of retirement savings, tapping on your home capital will help you compensate for your income, allowing you to better manage your expenses. These funds can be used to cover bills, emergency costs, and even home improvements, making them more comfortable with age. Big warning: This strategy relies on your ability to pay off your loan or HELOC. If you haven’t drawn Social Security yet, you may be able to repay your benefits funds later. However, if you are completely retired and struggling to achieve your goals, you may not have the means to pay off your debts, even if you don’t need to pay off immediately.
There are other obstacles to this strategy as well. If you’re still paying your first mortgage, tapping on capital will increase your costs and reduce your debt. If your income drops at retirement, even getting a stock loan can be difficult.
If you need retirement income, a reverse mortgage may be a better option than a home equity loan or HELOC. With a reverse mortgage, the lender pays a lump sum or a series of monthly payments. How much you can get is based on the value of your home. Your loan balance (and interest) will be paid when you move, sell your home, or die. Most reverse mortgages include a “non-recourse” clause. This stipulates that you (or your property) cannot exceed the value of the home when the loan deadline comes (so if your home depreciation is less than the balance on the loan, then no one is on the hook of the difference).
Benefits: There are no monthly repayments while you live in the house and there are no income or credit score requirements, so you can qualify even if you are struggling financially. However, to obtain a reverse mortgage, you usually need to be over 62 years old and have substantial fairness at home. That means your major mortgage will pay off, if not perfect.
Travel comes with a steep price tag, and tapping on your home capital will help you cover your expenses without increasing your credit card debt. But even the best vacations won’t last forever and home equity debt can last for decades, so consider your decision carefully. Is travel potentially at risk to pay for your home?
8. Big ticket items
It is possible to use home equity for high-priced purchases, but in many cases it is not added.
For example, take a car. Home equity loans have much longer repayment terms than car loans, resulting in reduced monthly payments. But that also means paying far more interest over time. Autos are also depreciating assets. This means that by the time you finish paying off your stock loan, your car is worth far less than you paid.
The same problem applies to expensive experiences such as weddings and holidays. Once you get into debt, putting your home at risk in the process is usually not a good route to cover these types of discretionary costs. Even if they provide lifelong memories, they should not spend their entire lives paying them.
How do I calculate the amount of home equity I can borrow?
With a Home Equity Loan, using most lenders allows you to borrow between 80% and 85% of the loan-to-value (CLTV) ratio. It is called “merger” because it takes into account both your current mortgage and the additional loans you will undertake.
CLTV is calculated by taking the total amount of money you owe on a household-based debt and dividing it by the total amount of your home. For example, if your home is worth $450,000 and you have an outstanding mortgage amount of $200,000 and want to get a home equity loan for $50,000, here’s how to calculate your CLTV:
You can also use a home equity loan calculator to understand how much you can borrow.
