Home equity is one of the best assets that many people have available to them. It’s a large source of personal wealth, a potential tool for financing a number of different personal projects and even business endeavors. There are significant ways that you can use your home equity to your advantage.
But what is home equity? You’ve probably heard the term, but you might not have a solid idea. Let’s break it down and make it simple.
- Home equity is the amount of value in your home that you actually own. Most people use a mortgage to purchase their home; this means that, while you’re making payments to the bank, you technically don’t own the value of your unpaid balance. Equity is essentially the amount that you do own – plus however much your home has increased in value, if it has.
Today, we’re going to tell you about three innovative ways that you can use your home equity to your advantage. Thanks to these financial products, the value in your home isn’t locked in there, out of reach. With the right strategies, you can put it to work today.
Refinance to fund home improvement projects
Home improvement projects are expensive. Whether it’s renovating an outdated kitchen, adding a room to your home, upgrading a worrisome bathroom, or installing solar panels, it can run a pretty serious tab. Many people struggle to find the right source of funding that can take them through the project.
Here’s where your home equity can work to your advantage. By refinancing your home, you can tap into your equity and use that money to put it toward your home improvement projects. A common type of refinance used for this is the cash-out refinance.
Basically, you borrow money back from your lender, and use that money for whatever project you need it for. Then the amount you borrowed is added back to your total mortgage. In most cases, your lender will allow you to take out the extra money for the same rate you originally borrowed – or, if you’ve been a really responsible borrower, sometimes an even lower rate.
Use a Home Equity Conversion Mortgage to help fund retirement
Home equity is a great source of built-up wealth for many Americans, especially older Americans who have owned homes for longer, have likely paid off their mortgages (or are close to it), and who might need to access their wealth to fund their retirement.
While having a retirement savings is always a good choice, using a Home Equity Conversion Mortgage, often called a reverse mortgage, to help fund retirement can be a helpful solution for those who need extra cash to make ends meet. This works a bit like a cash-out refinance, but with different terms: basically, you get the money up front, but later, the value of the home is used to pay off the balance.
Keep in mind, however, that reverse mortgage regulations can differ by state – for instance, a reverse mortgage in Florida can be very different from one in New York. Be sure to talk with a financial planner or reverse mortgage expert before making any plans.
Take out a hard money loan to finance your real estate ventures
Lastly, home equity can be a great way to finance your real estate investment business. If you own a significant amount of equity in your home and are looking to start a fix and flip business, for instance, you can use the equity in your home as leverage to take out a hard money loan.
Hard money loans are backed by real property and assets rather than your personal credit score. That means there is some risk involved – if your fix and flip venture flops, for instance, and you can’t sell and make your money back, the lender could come for your home.
While this might be a better option for those who are less risk-averse, hard money loans can also be a valuable tool for furthering your real estate investment business, as they allow you to access funds quickly, simply, and in time to make a solid offer on your investment property.
Home equity is an asset, and like any asset, it can be used for a variety of ventures. Be sure to talk to your financial planner today to find out more about whether you can access your home equity.
