Most people who have equity in their home think about using that equity using one of two methods. First, there are those who opt to refinance their home and get the equity in cash — a cash-out refinance. Others opt to take out a home equity loan which has a similar result, you get the cash value of the usable equity in your home. Another option to consider however is the home equity line of credit. Like the other two options, a home equity line of credit — a HELOC — allows you to access the equity in your home. However, unlike the other two options, you decide how much of the funds you want to use, and when you want to access them.
Home equity lines of credit give you more options because if you are not ready to use the funds, you need not take the funds. Only when you draw funds down from the line of credit are you obligated to make any payment. Depending on the terms, you may also have the option of using the same funds repeatedly, much like you would a credit card. As you make a payment and reduce the amount of principal owed, you have the option of reusing the line of credit. Here are nine ways millennials, and others, can take advantage of the equity in their homes.
1. HELOC For Debt Consolidation
According to a study conducted by Experian, millennials have an average amount of $4,712 each in credit card debt as calculated during Q1 2019. Credit cards have notoriously high interest rates when compared to a home equity loan. On the lowest end, credit card issuers charge about 14 percent interest while a HELOC rate can be as low as six percent. This is a significant difference and can save you a lot of money over the repayment period.
2. Real Estate - Investing for Your Future
While there is no guarantee that real estate values will always remain high, another practical and creative way to use a HELOC is to fund the purchase of an investment property. When you apply for a mortgage for a second home which you do not intend to occupy, there are different down payment requirements. In nearly all cases, you should be prepared to make a down payment of 25 percent of the purchase price. A home equity line of credit could offer you the cash you need. Additionally, investment property can add a new stream of revenue to your monthly income when you rent out the property. Remember, when you make a significant down payment, you are also creating additional equity which may give you the option of obtaining another home equity line of credit later.
3. Educational Expenses — Reduce or Prepare
Whether you have several student loans and you are considering consolidating the loans, or your children are currently thinking about college, education is expensive. A HELOC can help you prepare for college, or help you reduce your current student loan debt. According to a recent release by the Bureau of Labor Statistics (BLS) millennials have the highest levels of student loan debt. If you are planning to use a HELOC for reducing existing student loans, be sure to review your current payments and interest rates carefully so you are not paying more using your HELOC.
4. Investing in Your Current Residence
Regardless of how long you have lived in your home, the chances are high there is something you would like to change. Whether you are considering upgrading your roof, going solar, or you are considering landscaping your property, a home equity line of credit can provide you the funds you need to invest in your current home.
5. Fulfilling a Dream
Destination weddings, a dream vacation, or a cruise for the entire family — these are some of the more exciting ways of using the equity in your home. Make sure before you decide to use your HELOC in this manner you are not going to regret later. After all, using the funds from a home equity line of credit to splurge may not fit your overall financial goals.
6. Making Self-Employment a Reality
For millennials who have the entrepreneurial spirit but are having problems securing business loans, a home equity line of credit can provide the funding you need to launch a new business. Many studies over the last several years have shown that millennials are more likely to forgo traditional business models and go to work for high-tech start-ups or opt to work for themselves. Using a HELOC to fund a new business can be rewarding in the long run.
7. Saving for a Rainy Day
There is no doubt many of us are poor savers. However, a HELOC can help you get a leg up on some of your savings needs. If you have no current emergency fund and you are concerned that a sudden problem with your car, furnace, or other big-ticket item could wipe you out financially, a home equity line of credit could be a great fallback. Remember, if you have not drawn any funds down from the HELOC, you are not making any payments. If you do take a draw of funds, you are only making payments on the amount drawn, not the entire balance.
8. Creating a Nest Egg and Taxes
Millennials may feel retirement is years away, and for most it is at least a couple of decades in the future. However, this time gap does not mean you should avoid planning for retirement. In addition to the earnings on your retirement savings, there may be tax benefits available which could help offset the cost of using your home equity line of credit to fund your annual retirement account or start your retirement account for the first time. Before using a HELOC in this manner, make sure you explore the pros and cons.
9. Caring for Family
Millennials are often faced with the challenge of caring for an aging parent or grandparent. Having some financial flexibility can be very helpful in this situation which is when a HELOC can be very beneficial. You may also be expecting a new family member either through birth or adoption and having access to additional funds could prove helpful.
While a home equity line of credit is not right for everyone, these are some simple idea to make use of the equity you have worked so hard to build up in your home.