The idea of using a house as collateral to obtain credit is older than you think. And although it’s an old idea, it’s still a pretty good one. So in this article, we’ll discuss 7 ways you can use your home equity to make more money. But first, let’s take a look at what home equity is and how it works.
What Is Home Equity?
Home equity is the portion of your home’s value that you actually own. You can calculate it by subtracting the amount of your outstanding mortgage from your home’s current appraised value. For example, let’s say your home is worth $250,000 and you owe $150,000 on your mortgage. That means your home equity is $100,000.To learn more about equity, click here.
Home equity loans and home equity lines of credit (HELOCs) are two popular ways to access your home equity. With a home equity loan, you borrow a lump sum of money and make fixed monthly payments.
A HELOC works like a credit card — you’re given a line of credit that you can borrow from as needed. The interest rate on a HELOC is variable, and you only owe interest on the portion of the line of credit that you actually use.
How To Use Home Equity To Make More Money?
There are a wide range of options for making more money using home equity. Let’s discuss some of the more popular ones.
1. Selling Your House And Buying A Smaller One
If you have a lot of home equity, you may be able to sell your current home, buy a smaller one, and pocket the difference. Of course, this isn’t an option for everyone. But if you’re empty nesters who are looking to downsize or if you’re simply interested in moving to a different neighborhood or city, this could be a great way to use your home equity to make more money.
2. Refinancing Your Mortgage For Lower Monthly Payments
If you have good credit, you may be able to refinance your mortgage and get a lower interest rate. This will lower your monthly payments, freeing up cash that you can use for other purposes. Just be sure to shop around for the best deal and to factor in the costs of refinancing, such as closing costs. You usually need a 20% home equity before you can opt for refinancing.
3. Renting Out A Part Of Your House
If you have a spare bedroom or finished basement, you may be able to make some extra money by renting it out. You can use sites like Airbnb to list your space and set your own prices. Just be sure to check with your local laws first to make sure that this is allowed in the area.
Before you can rent out your house, you might need to renovate it and make it liveable. And if you have home equity, you may be able to use it to finance a home improvement project. This can also be a great way to add value to your home and make it more comfortable to live in. Plus, if you eventually sell your home, you may be able to recoup the cost of the improvements.
4. Taking Out A Home Equity Loan To Invest In Another Property
If you’re interested in real estate investing but don’t have the cash to buy a property, you may be able to use a home equity loan to finance the purchase. Just remember that you’re putting your home at risk, so this is not a decision to be made lightly. And be sure to do your homework and research the property thoroughly before making an offer.
5. Investing In Yourself With Home Equity (e.g., Taking Courses, Starting A Business)
You can also use home equity to invest in yourself. This could include taking courses or training to improve your job prospects or using the money to start your own business. Of course, there are risks involved in any business venture, so be sure to do your research and create a solid business plan before making any decisions.
If investing in a business sounds too risky to you, just focus on upskilling yourself by taking courses of your interest. A better skill set will ultimately translate into more money down the line.
6. Paying Off High Interest Debt With Home Equity
If you have high interest debt, such as credit card debt, you may be able to use home equity to pay it off. And although this won’t exactly make you more money, it can be a good way to save money on interest and get out of debt more quickly.
But once again, this is not a decision to be made lightly, as you’re putting your home at risk. So be sure to consider all your options before making a decision.
7. Using A HELOC To Invest In Stocks, Bonds, Or Mutual Funds
If you’re interested in investing but don’t have the cash to do so, you may be able to use a HELOC (home equity line of credit) to invest in exchange-traded funds, stocks, bonds, or mutual funds.
But before you do this, it’s important to understand the risks involved. For starters, the value of your investments can go down as well as up, so you could end up losing money. And if the value of your investments goes down, you may end up owing more on your HELOC than the value of your home. So tread carefully before using a HELOC to invest in the stock market.
Final Thoughts
You can find out your home equity by calculating the difference between your property’s value and the amount you owe to the bank.
There are many different ways to use home equity to make more money. But before you make any decisions, it’s important to understand the risks involved. Be sure to do your research and consult with a financial advisor to make sure that you’re making the best decision for your unique situation.