Over 65% of Americans own homes and get to reap the benefits of homeownership, while many renters are saving up for homeownership because of the overwhelming advantages. Monthly mortgage payments will eventually go away as you continue making loan payments, while renters make monthly payments without building equity. Homeowners can also use their properties as extra funding sources via home equity. Your down payments, monthly mortgage payments, and home appreciation increase your home equity. Some homeowners may feel nervous about borrowing against this equity since this strategy increases their debt. However, having that extra option provides more financial flexibility and can come in handy.
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When Should You Borrow from Your Home’s Equity?
While homeowners shouldn’t rush to borrow from their home’s equity, it can be the right move for some purchases and investments. Tapping into home equity provides a sudden boost in the capital that can cover financial shortcomings. You get the money for an important expense immediately and can repay it gradually.
Homeowners can save enough money for these expenses, but some purchases and investments only present themselves for a limited time. Waiting to accumulate enough money can result in missed opportunities and experiences. You may miss out on a great investment or a wonderful getaway by accumulating funds without considering your home’s equity.
7 Common Ways to Use Your Home Equity
Homeowners can use their home equity in any way they desire. However, most people use a home equity line of credit or another financing method for one of these common reasons.
1. Buy a New Home
A home equity loan can provide enough financing to afford a new home. Some people use a home equity loan to buy a second home, but it’s also common to see home equity loans in action during transitions. Some homeowners will find their next home before finalizing a deal on their current home. You don’t want to miss out on your next home because you don’t have the proceeds yet. Homeowners making a move often sell their current homes. You can utilize your home equity to purchase the new home and give yourself enough money to cover a few mortgage payments.
Taking out enough equity makes two mortgage payments more doable until you find someone to buy your current home. If you are buying a second home, you can use home equity to cover the down payment and then manage both mortgage payments. Without home equity, it can take several years to save enough money for a down payment. You may lose out on great opportunities and watch prices rise if you wait too long. Home equity accelerates your path to a second home or a new property.
2. Use It for Your Retirement
People work for several decades and save some money to prepare for retirement. You can put your money to work in a portfolio and collect cash flow, but you can also take out a home equity loan. A home equity line of credit lets you borrow against your home without making fixed monthly payments. Some people hope the home equity loan outlives them. Then, their heirs get the home and can pay off the home equity loan by selling the house.
The only risk with this strategy is if you outlive your home equity payouts. You will then need an additional funding source and have high debt. Most people have limited income options by the time they have exhausted home equity during their retirement years. Some companies like Unison let you access debt-free home equity. You won’t have to worry about making monthly payments or contending with rising interest rates.
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3. Repair or Renovate Your Home
Homes endure wear and tear over the years and lose some of their functionality. Some homeowners replace their roofs every 10-20 years, while others want modern kitchen appliances. Some structural flaws occur gradually–mold, for example. During thunderstorms, floods, and other natural disasters, a home might suffer abrupt structural damage. Home equity lets you cover routine home improvements and urgent repairs. Time isn’t always on your side when you need to fix your home. Borrowing against home equity allows you to get immediate repairs and renovations instead of accumulating cash for several months before seeing any progress.
4. Consolidate Debt
Debt consolidation simplifies your financial obligations and can help you score a lower interest rate. Debt consolidation is the process of taking the capital from one loan and dispersing it across smaller loans. Many borrowers use debt consolidation to eliminate their credit card debt since this balance has a double-digit interest rate. Home equity financing has a single-digit interest rate which makes it easier to repay. You also don’t have to visit several platforms and remember payments for numerous small debts. Consolidating debt makes it easier to cover everything.
5. Cover Medical Emergencies
You can’t plan a medical emergency. People get sick and need adequate resources and professional assistance to recover. Some medical expenses will exceed the amount of cash in your bank account, but most of these procedures can’t wait. Borrowing against your home equity gives you enough money to afford medical bills and provide yourself or a loved one with the proper care.
Medical bills take a toll on many people’s finances. Medical expenses contribute to more than 60% of bankruptcies. Tapping into home equity can save you from this fate and avoid delaying urgent care.
6. Pay for Education Expenses
Tuition continues to rise, and moving one or more children from high school to college can present quite the sticker shock for many families. Some families face tuition bills exceeding $40,000 per year for a single child. To shield their children from burdensome student debt, some families will tap into home equity instead. Home equity can make the expenses of higher education feel more manageable and keep your child out of debt. Parents who plan to send their children to college can financially prepare as high school graduation gets closer, but home equity can provide reassurance that college expenses will get covered.
Investing allows your money to compound over time, but you need money to get started. You can invest a percentage of your weekly paycheck, but this strategy may not lead to sufficient growth. Some homeowners use equity to speed up portfolio growth. Home equity can help you afford a down payment on a rental property, buy stocks, and purchase other assets. Investing your home equity proceeds is risky, but your wealth can rise substantially if you pick the right assets. Low-interest rates make this strategy more enticing since you only have to outperform the interest rate to generate an ROI (return on investment).
Access your Home’s Equity Without Taking a Loan
Borrowing against your home equity can provide substantial financial flexibility. Home equity can help you cover large expenses and keep you afloat during your retirement years. However, most people do not want to incur additional debt. However, you can tap into your home equity without getting deeper into debt.
Unison allows homeowners to obtain home equity proceeds without making monthly loan payments or worrying about the variable interest rates of a HELOC. Unison is not a traditional lender. With their equity sharing agreements, they give you money for a percentage of your home equity, and you only have to repay Unison their cut when it’s time to sell. You won’t have to pay as much to Unison if your home’s value declines, and if the value of your home rises, both parties win. Discover how Unison can help unlock your home equity.