High mortgage rates and low housing inventory are keeping housing demand up and home prices firm. While that makes the market less affordable for prospective buyers, current homeowners can take advantage of a growing source of wealth: home equity.
With property values on the rise, home equity has been increasing for many Americans who have mortgages, giving them more opportunities to secure funds for their financial needs. The average homeowner with a mortgage can tap into $193,000 just from owning a sizable chunk of their home, according to mortgage data firm Black Knight.
With this powerful asset at your disposal, you can take out a home equity loan or home equity line of credit (also called second mortgages) to cover just about any expense, using your home as collateral. And you can slowly pay it back at lower interest rates compared to some other forms of borrowing, such as a credit card or personal loan. Just be aware that home equity products come with risks, including foreclosure if you fall behind on payments.
A 2023 study from the Mortgage Bankers Association shows that debt consolidation, home renovations and emergency funds are high priorities for many borrowers. To get an idea of how homeowners approach these options, we spoke with a few who leveraged their home equity to get ahead in their finances.
The risks of using your home equity for financing
Experts recommend thoroughly evaluating your financial circumstances and determining if your expenses justify the risk of borrowing money with a home equity loan or HELOC, particularly if you struggle to manage monthly payments. Generally speaking, homeowners shouldn’t use a home equity loan for one-time expenses like a wedding or vacation. Those reasons are not worth putting your home on the line.
But using home equity to get ahead financially — such as paying down high-interest debt or making informed investments — may be a smart strategy.
Read more: Home Equity Loan vs. HELOC: What’s the Difference?
Using a home equity loan to knock out credit card debt
Credit card debt has been rising as US households struggle to keep up with bills amid job layoffs and high inflation. Once interest starts compounding on a pile of credit card debt, it’s hard to get it under control.
That’s what happened to Rob Carmichael and his wife after buying a home in Salem, Massachusetts, in 2018. Within weeks, they had their first child and experienced a job layoff, and the family started putting expenses on their credit cards. Carmichael found a new job quickly, but “we were just treading water,” he said. His family racked up an estimated $40,000 in credit card debt.
Carmichael was putting about $2,000 a month toward the credit card balances, but a big chunk went toward covering interest, even though he got some breathing room with balance transfer credit cards. He considered using a personal loan or a 401(k) loan to consolidate the debt, but the numbers weren’t working out.
After a few years, the balance was down to $25,000. A friend suggested Carmichael look into a home equity loan for debt payoff. Home equity loans are attractive because they offer predictability and structure, with the same interest rate and monthly payment during the entire loan term.
Carmichael got the home equity loan from the same lender as his first mortgage, which expedited the process and minimized costs. Based on his home equity and other financial factors, he could have borrowed nearly $200,000, but Carmichael took out a more manageable sum of $30,000.
“This strategy is great for homeowners who want to hit the reset button on their financial life, and generally have healthy spending habits,” said Jeff Levinson, CEO of House Numbers, an app that helps homeowners tap into their equity.
But it’s not a good idea for everyone. “Without addressing underlying budgeting problems that may have led to the initial debt, homeowners could find themselves in a harmful cycle,” Levinson said.
Carmichael and his wife have already addressed their underlying budget problems, so they’ve been successful with the loan. Their monthly payment is down to $650.
“We’re paying it back very quickly,” he said. “It was the fastest, easiest way to pay off that debt and to stop the bleeding with the interest.”
Read more: When Not to Use a Home Equity Loan
Using a HELOC to pay for home renovations
Paying for home improvements is one of the most popular ways to use HELOC and home equity loan funds. About two-thirds of respondents in the Mortgage Bankers Association study said home renovations and remodeling were the reasons for applying for this type of financing.
“It’s a great option for clients needing a short funding source that they intend to pay off with [something like] an upcoming bonus,” said JR Younathan, senior vice president at California Bank & Trust.
Will and Alejandra Fravel, a couple living in Valrico, Florida, decided to take out a HELOC on their property to handle a few home projects. They also used some of the funds to pay down $10,000 in credit card debt.
“Our credit cards had a high interest rate, around 15% to 20%,” Will said. “We took out a line of credit for $100,000 with a rate of 6%, give or take.”
A HELOC was attractive because they’ll only have to pay interest on the amount they draw. They got a good deal from their credit union, and the approval process only took a week.
Read more: Is a Home Equity Loan a Good Idea? Know the Pros and Cons
Using home equity financing for (riskier) investing
Some homeowners take a completely different approach to capitalizing on their home equity by using their funds to make informed investments.
Property flips and rehabbing a house are excellent ways to grow your wealth and net worth, according to Younathan. In some cases, he said, homeowners might earn more using this strategy compared to renting out an investment property for the long term.
However, it’s important to understand the real estate market and weigh the risks of drawing from a HELOC before getting started.
Trent Davis, a Coldwell Banker Realty broker associate with 15 years’ experience in the real estate industry, bought a home near Tampa, Florida, in 2018. With his mortgage being his only debt, he took out a HELOC on the property a few years later. He borrowed about $75,000 from the line of credit to buy an investment property and make minor repairs. Davis then sold the home for about $100,000, paid back the line of credit and pocketed the remaining $25,000 in cash.
Since there’s a danger in using a loan to make an investment, Davis said he knew it had to be a sound plan.
Since he was paying a very low 3.5% interest rate on the HELOC, Davis then used $10,000 from the line of credit to invest in the stock market.
“It was a calculated risk,” Davis said, “but I knew I’d get a lot more out of the investment than the cost of borrowing the money.”
With his stock market earnings, he paid down the line of credit again and kept the proceeds invested. The HELOC is now paid off and available as an emergency fund if he needs it as a safety net.
Read more: What Are the Risks of HELOCs and Home Equity Loans?
How homeowners can meet their financial goals
Like these homeowners, you may be able to leverage your home equity to get financially ahead.
Home equity financing has plenty of advantages, namely lower interest rates than other types of loans. But because this type of borrowing is secured by your home, your lender has the power to repossess your property if you miss multiple payments or default on the loan.
Once you’ve researched the pros and cons of tapping equity, consider how you’ll use the money. Consolidating high-interest debt and paying for home renovations are the main ways homeowners use this type of financing. But you have plenty of good options.
The next step is figuring out how much you can borrow and researching home equity loan and HELOC lenders. From there, you can apply for the loan that fits your needs.
