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Smart home equity moves to make now

In certain circumstances it may be smart to use your home equity to pay off debt or make household repairs. Getty Images/iStockphoto

Trying to afford car expenses, groceries and other everyday items can be hard enough in this economic environment. But what if you need additional cash, such as to cover unexpected home repairs or to catch up on mounting credit card debt?

One option for some homeowners is to tap into their home equity, such as through a home equity loan or a home equity line of credit (HELOC). However, if you're going to use your home equity, it's important to understand the risks compared to the potential benefits. 

With a home equity loan or HELOC, your home generally serves as collateral, meaning you could lose it to the lender if you don't pay back what you owe. And by taking on more debt, you might ultimately increase your expenses as you pay back the principal plus interest.

The upside, though, is that home equity loans and HELOCs can provide access to significant amounts of cash, often at lower interest rates than some other options, like personal loans or credit cards. And you can potentially gain advantages like a tax deduction on home equity loan or HELOC interest, depending on how you use the funds. 

If you think this sounds beneficial then start exploring your home equity options here now to see how much you could get.

Smart home equity moves to make now

The exact pros and cons can differ from person to person, but if you think using your home equity may be good for you, it can be helpful to think through some of the best ways to use it. Specifically, homeowners might consider the following:

Don't use more home equity than you need

The first thing to note about home equity loans and HELOCs is that you want to be careful about how much you use and what you use the funds for. It might seem tempting to, say, take out $100,000 if your home has appreciated in value.

But if you spend that money on things like new cars and big-screen TVs, it's not as if those new items are free. You still have to repay the home equity loan or HELOC, and when you factor in interest rates, you're making these purchases more expensive than if you had saved up for them.

Check interest rates on home equity loans and HELOCs here now.

Use it for home repairs and renovations

While you probably don't want to make excessive purchases, you might use your home equity to make home repairs and renovations. Doing so can make your home more enjoyable to live in while also potentially boosting the value of the home.

Plus, when you use home equity funds to substantially improve your home, you may be able to get a tax deduction on the interest you pay for a home equity loan or HELOC.

According to the IRS, a substantial improvement either "Adds to the value of your home, Prolongs your home's useful life, or Adapts your home to new uses."

The rules can get a little tricky though, such as how repainting, when used to maintain your home's condition, isn't considered a substantial improvement by the IRS. But the agency notes that painting as part of a renovation that's a substantial improvement is deductible. So, you may want to consult with a tax advisor before assuming you can deduct home equity loan or HELOC interest.

Pay off higher-interest debt

Another way to potentially use home equity to your advantage is to borrow these funds to pay off higher-interest debt.

For example, if you have a home equity loan with a 7% interest rate and credit card debt with a 20% interest rate, it could make sense to pay off the credit card debt with your home equity loan and then manage the loan with the lower interest rate.

That said, this strategy isn't always so simple. You also have to account for things like closing costs. And if you take out variable financing, as is the case with many HELOCs, you don't know what interest rates will be in the future. Plus, you're putting your home at risk if you can't pay back the new debt.

Be sure to fully understand the terms of any home equity loan or HELOC and weigh the pros and cons before taking on new debt to manage your old debt.

Check interest rates on home equity loans and HELOCs here now to see if it's worth it for you.

Consider investments

It's also possible to find opportunities to come out ahead financially by investing HELOC or home equity loan funds into other areas that outweigh the financing costs.

Similar to paying off higher-interest debt, this is not a decision to take lightly. Investing home equity funds can be very risky, so you should be crystal clear about what you're getting yourself into.

That said, an individual with a high risk tolerance might use their home equity to buy an investment property, for instance. Renting out that investment property could potentially outweigh the costs of paying back the home equity loan or HELOC.

Remember, though, that borrowing against your home equity means putting your home at risk. If your investments tank, and you can't repay what you borrowed, you could lose your home. It's also possible in some circumstances for lenders to call in their loans early.

Again, only certain investors would be comfortable with this strategy. But it's possible that some will find opportunities to leverage their home equity into profitable investments.

Cover income gaps

Some homeowners also tap into their home equity to cover income gaps.

For example, if you need to stop working for a few months to take care of a family member, you might use a home equity loan or HELOC to help replace your income. Of course, that adds costs when it comes to repayments, but it could be less expensive than, say, racking up credit card debt.

Retirees might also use a HELOC or home equity loan to cover shortfalls in their retirement income. This too comes at a cost, but some people might prefer that option more than, say, a reverse mortgage, depending on the terms of the different financing options.

Making these types of decisions can help homeowners gain flexibility and potentially come out ahead financially. Still, borrowing against your home equity can be risky, and what seems smart to one person may seem unwise to another. So, take your time weighing your options and consider speaking with a trusted professional to better understand the pros and cons based on your situation.

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