When Does It Make Sense to Use Your Home’s Equity?

Written by Posted On Tuesday, 30 November 2021 00:00

Housing prices continue to rise significantly, with median home prices soaring past $400,000 for the first time. Housing prices have been going up for eight years. This means if you’re a current homeowner, you might have a significant chunk of equity in your home.

When does it make sense to use that equity and put it to work, particularly since interest rates remain low?

The Benefits of Using Equity Now

There are some economic factors outside of your personal situation that could make now a good time to use your home’s equity.

• Mortgage rates are historically low, meaning it’s cheap to borrow money right now. You could end up taking equity out and then earning a lot more than you would pay in interest on a mortgage. Since rates are low and you can lock in your rate for an extended period, you might not see your mortgage rates increase, if at all.

• Inflation is going up at near-record paces, and that makes the idea of fixed-rate debt pretty appealing. If you get a fixed-rate mortgage for 30 years, your payments will be cheaper in real dollars.

• When you have borrowed equity, the interest is tax-deductible, and it’s tax-free.

• If you use the equity in your home, you’ll have liquidity, so you can take advantage of opportunities as they might arise.

Are There Risks?

Some risks can come with taking the equity out of your home as well.

For example, if you already have a high debt-to-income ratio, taking on more debt is never wise. If your income is at risk, you should avoid taking on new debt as well.

How Do You Know Where to Invest?

If you want to take equity out of your home, the goal is that you’re earning more than the interest rate on your loan. There are a lot of ways you can do this.

For example, you could invest in the stock market or a real estate investment trust (REIT).

Other financially wise ways to invest the equity in your home include:

• To secure a stronger financial future, you might consider tapping into your home’s equity to pay off high-interest-rate debt. For example, if you have a credit card with a 16% interest rate, and you get a loan with a 3.5% interest rate, you’re going to get yourself out of debt faster, and you’re going to reduce what you’re paying in interest significantly.

• Investing in real estate can be a smart way to use your home’s equity. For example, you might use the money from your home equity to then put a down payment on a rental property.

• Starting a business is a way to invest in your future, although it’s risky.

The goal, if you’re considering now as the optimal time to tap into your equity, is to invest in something that’s going to generate income. You want to pay back your loan with income so that you grow your wealth for the future.

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