Do you have a lot of home equity and you’re looking to put it to good use? Here are 4 of the best uses for home equity financing.
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Do you have a lot of home equity and you’re looking to put it to good use? Here are 4 of the best uses for home equity financing.
Perhaps the most popular use for home equity financing is debt consolidation. Borrowing money from your home is perhaps the cheapest way to do it. Because it’s backed by a real asset, the family home, lenders are able to offer a lot lower of an interest rate than if you borrow money that wasn’t secured (i.e. an unsecured line of credit or personal loan).
Credit card balances are the most obvious uses for home equity. If you’re carrying balances on your credit cards, paying 18% or 19% in interest, using a home equity loan to pay it off is a no brainer. Not only can you save on interest, you can improve your cash flow situation as well.
You may be paying $500 a month towards your credit cards, with all the money going towards interest and nothing towards principal. However, if you rolled that debt into your mortgage, most of the money could instead go towards principal, helping you reach debt freedom a lot sooner.
Credit card balances aren’t the only debts it makes sense to pay off with home equity financing. Basically, any debt with a higher interest rate can make sense to pay for. This includes personal loans, unsecured lines of credit and car loans.
Another great use for home equity financing can be home renovations. When you want to pay for home renovations you have a couple of choice. You can save the money or borrow the money. If it’s a smaller renovation, it may only take you a few months to save the money.
However, if it’s a bigger renovation, it could make sense to borrow the money, especially if the renovation needs to be done now. For example, a new deck in the backyard can probably wait, while delaying replacing your room can causes a lot more damage, especially if it’s leaking.
The great thing about home equity financing is that you can use the money as you see fit. Unlike the Purchase Plus Improvement Program, you don’t need to have a list of specific renovations approved by your lender. You can usually just say that the money is being used towards home renovations and that should be good enough.
If there’s one thing that we’ve learned about the pandemic is the importance of an emergency fund. The old rule of thumb used to be to have 3 to 6 months’ living expenses in a high-interest savings account. However, what the pandemic has taught us is that you might require a lot more, depending on how stable – or not – your financial situation is.
There’s also an opportunity cost to having that much money tied up. You could be investing it earning 7-8% return long-term in the stock market. That’s why it can make a lot more sense to use home equity financing towards emergency savings. That way you can tap into it when you need it and only pay interest on money that’s withdrawn.
Last but not least is using home equity financing to invest. Did you know that you can use your home equity to invest in the stock market? Yes, that’s right, you can.
With inflation at a 30 year high, the rising cost of living is making it harder than ever to come up with extra money to invest from your personal cash flow. Usually, people are investing less because they are finding it tough to pay for the other necessities, such as gas and groceries. But this is the complete opposite of what you should be doing. You should be investing more money, not less, to keep up with the rising cost of inflation.
There’s also an opportunity cost to not investing sooner. You’re giving up on years of potential investment gains.
If you have a lot of home equity, why not use some or all of it to invest? You could invest the funds in your RRSP or TFSA. However, if you invest your funds in a non-registered account, you can claim the interest as tax deductible in many cases, which is a nice added bonus.
There you have it, 4 of the best uses for home equity financing. Consider these when you have extra home equity you want to put to good use.
