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.
