Americans under age 35 up to age 54 have an average of $20,000 to $70,000 of equity in their homes, according to the U.S. Census Bureau. Typically, equity in homes increases as the person gets older and pays down their mortgage. If you're sitting on tens of thousands of dollars of equity, here are a few things you can do to take advantage of low home equity loan rates and put some extra cash in your pocket.
We spoke with David Steckel, Consumer Product lending executive at Bank of America, on some of the best uses of home equity loans and lines of credit (also called HELOCs).
1. Make Necessary Home Repairs
"We are finding that rising home values are inspiring home improvements," says Steckel. "With improved home values, low interest rates and consumer confidence on the upswing, many homeowners are deciding that now is the time to update or remodel their homes."
Perhaps your air condition unit is on its last leg or your windows need replacing. Or, maybe your gutters been neglected for too long. Homeowners typically spend one to four percent of their home's value on maintenance and repairs each year. So, if your home is worth $250,000, you can expect to pay between $2,500 and $10,000 on repairs. A home equity loan could be exactly what you need to fix up your home and get it in tip-top condition.
2. Update Your Home
Perhaps you've been dreaming of stainless steel appliances, granite countertops and new cabinetry. In 2016, the average cost of a kitchen remodel is just under $20,000. Not only will this make your home more enjoyable and functional while you're in it, but the return on investment (ROI) of kitchen remodels is typically 70 percent. That means if you do spend $20,000 on your remodel, you could sell your home for $14,000 more and recoup some of those expenses.
And let's not forget updating your home to make it more environmentally friendly, either. "There is a growing interest among homeowners exploring green and energy efficient home improvements. For example, beyond energy efficient appliances, some homeowners are considering solar panels and landscaping designed for water conservation," states Steckel.
3. Pay for Children's College Expenses
"While home improvements lead by a wide margin in terms of HELOC uses, the next most popular use is education," says Steckel.
Direct Plus loans (loans parents take out to help their children in college) have an interest rate of 6.84 percent in the 2015-2016 school year. For a home equity loan of $50,000, interest rates are as low as 4.11 percent as of March 2016. While student loans can be extremely beneficial to students who do not yet have an established credit score, they can be a more expensive form of borrowing for parents with a decent amount of equity in their homes and excellent credit scores.
4. Consolidate High Interest Debts
Because of low interest rates, home equity loans are one of the best ways to consolidate high interest debts, such as credit cards, personal loans and even auto loans. If you've been attempting to get rid of your credit card debt but just can't seem to make more than the minimum payment, a home equity loan can be one of the best ways to pay it off for good. Just make sure to cut up the credit cards so you don't rack them back up again while paying off your home equity loan.
5. Open a HELOC as an Emergency Fund
Perhaps you don't have any major expenses on the horizon, but you also don't have a significant amount of savings built up in case of an emergency. Instead of taking out a home equity loan, you could opt to open a home equity line of credit, or HELOC. A HELOC is similar to a credit card in that you're given a revolving line of credit and you only pay interest on the amount that you use. While interest rates do fluctuate with the market for most HELOCs, some lenders do offer fixed-rate HELOCs where you can lock in the interest rate for a specified period of time.
What Not to Do with Home Equity
What borrowers use their home equity for is completely up to them. While some may, of course, use their home equity to fund a vacation or even elective surgery, unless you have a plan in place to pay off the loan, it isn't wise to risk losing your home over a non-necessary expense. David Steckel concludes that "while there aren't necessarily "bad uses" of home equity, it's best to consult with a local real estate expert to understand your home's value and to keep in mind what you can comfortably afford without affecting your other financial plans."
Home equity loans and HELOCs exist to give homeowners a relatively inexpensive way to borrow money. However, it's best to always proceed with caution, as the inability to pay back the loan can result in foreclosure on your house.