How To Use Home Equity: The Best (and Worst) Ways
- The smartest uses of home equity typically improve your financial position over time, while using it for luxuries, everyday expenses or depreciating assets can create costly problems.
- Before tapping your home equity, compare the loan options of a cash-out refinance, home equity loan and HELOC to find the best fit for your financial goals and budget.
- Borrowing against your home carries real risks, including foreclosure, so it’s important to weigh the benefits against the potential downsides.
Building home equity is one of the biggest financial benefits of owning a home. The equity you’ve built in your home may help you pay for renovations, debt or invest in another property.
But first, you should understand which uses of your home equity make the most sense and which could have long-term ramifications financially.
Best ways to use home equity
Riskiest uses for home equity
Home equity is the difference between how much your home is worth and how much you owe on your mortgage. As you make mortgage payments, your mortgage’s principal balance goes down and your home equity goes up. Rising home prices also increase your home’s value and can help you build equity even faster.
If your mortgage balance is lower than your home’s value, you have positive equity that can be converted into cash. When your mortgage balance is higher than your home’s value, you have negative equity, known as being “underwater” on your loan.
- A cash-out refinance may be the most familiar way to convert some of your home equity into cash. A cash-out refinance allows you to replace your existing mortgage with a home loan for more than what you owe. You pocket the cash difference between the two loans.
- A home equity loan, which is disbursed to you in a lump sum. The loan is repaid in monthly installments over a set term of five to 30 years (similar to your mortgage). Home equity loan rates are typically fixed.
- A home equity line of credit (HELOC), which is a revolving credit line that works like a credit card. You only pay back what you spend, plus interest, and your credit line can be reused as long as you have access to it. HELOC rates are usually variable, but fixed-rate HELOCs may be an option.
Unsure which option is best for you? Read our comparison of cash-out refinances vs. home equity loans. vs. HELOCs.
The 6 best ways to use home equity
Home improvements
It can be a smart move to leverage real estate equity to cover your next home improvement project, though not all improvements offer the return on investment you may be looking for.
Replacing a garage door can give you a 268% return on your investment, according to Remodeling Magazine’s 2025 Cost vs. Value Report. Meanwhile, you may recoup 80% of the cost of a typical midrange bathroom remodel but gain only about 53% of the cost of a midrange bathroom addition.
Of course, there are times when home improvements have to be done, regardless of whether you can earn back what you invested in doing them. If you desperately need a new roof to avoid leaks and other damage to your home, for example, that would be a smart way to use home equity, no matter how it may impact your home’s value.
More perks
Another benefit to leveraging your equity to pay for home improvements is that you may be able to deduct mortgage interest paid on a home equity loan, HELOC or cash-out refinance at tax time. You’ll lose that perk if you tap equity for other reasons.
Real estate investing
You could also use your equity to jump into real estate investing.
Let’s say you’re interested in getting an investment property loan to buy a rental property. One of the key requirements is a minimum 15% to 25% down payment.
That large amount of cash can be tough to come up with, but it’s a far lower barrier if you can convert some of your home equity to cash.
You could take out a home equity loan or HELOC against your main home. Ideally, the rental property would provide enough income to cover its own monthly mortgage payments plus maintenance, repairs and the home equity loan or HELOC payments.
More perks
Once you’ve built up significant equity in your first investment property, you can rinse and repeat the process by leveraging equity in that property to invest in more real estate. Real estate investing can really beef up your ability to build passive income and long-term wealth.
Higher education expenses
The average person with student loan debt is carrying a balance of around $43,000. That’s a ton of money for almost anyone, but homeowners with college-aged kids may have a distinct advantage: They can leverage their home equity to help fund higher education expenses.
More perks
You could help your child reach educational goals, which, in turn, can lead to an increase in their future earnings. You could also improve their financial quality of life, since student loan debt can impede saving for a down payment, building an emergency fund and access to future loans, including getting a mortgage.
Medical expenses
If you’re struggling to cover medical bills, your home equity could provide some relief. By tapping your equity to erase that medical debt, you can escape incessant harassment from debt collectors and work toward reversing any negative effects to your credit score.
More perks
Medical debt can be especially crushing if you’ve had to resort to high-interest credit cards to cover those bills. But if you rely on your home equity to get a loan instead, you’re almost certainly going to secure a lower interest rate and monthly payment in the process.
Debt consolidation
Depending on how much debt you have, using your home equity for debt consolidation can be beneficial because home equity rates are much lower than credit card rates.
For example, let’s say you have $25,000 or less in credit card debt. You could repay the debt at the current national average interest rate, which is over 23%, or take out a home equity loan to repay it at an interest rate of around 8%. You can enjoy huge interest savings by using your home equity to consolidate that debt.
Leveraging equity in this way is only a smart move if you refrain from racking up more debt after it’s paid off.
Otherwise, you’re just replacing your current debt, which isn’t tied to any collateral, with new debt that’s tied to your home.
Refinancing
While a traditional refinance doesn’t typically involve using home equity, some refinance options can allow you to use a portion of your available equity to cover refinancing costs rather than paying them out of pocket.
If you choose a limited cash-out refinance, you aren’t likely to have much money left over after you pay for the refinance, since conventional loan guidelines limit you to only a few thousand dollars.
If you’d like to access more money, you can choose a cash-out refinance. It will allow you to convert some of your home equity to a large lump sum that can be put toward other financial goals — and still leave you the option to use some of the funds to cover your refinance closing costs if you’d like.
Homeowners commonly use their cash-out refinance funds for the uses we’ve already covered: home renovations, debt consolidation, education expenses or other major purchases.
More perks
You can refinance — with or without taking cash out — with a credit score as low as 500 if you choose an FHA loan. For a conventional loan, you’ll need at least a 620 to refi, or a 680 if you want to also take cash out.
The 3 worst ways to use home equity
Vacations and other luxuries
Sure, exploring Tahiti in French Polynesia sounds like an unforgettable experience, but it’s not wise to finance nonessential travel with home equity. Unless you truly think a trip is worth losing your home over, it just doesn’t make sense to trade one week of rest and relaxation for a second mortgage.
The same goes for luxury items: they’re not worth putting your home at risk over because they aren’t going to improve your financial situation in the long run.
Covering everyday expenses
If you’re finding it difficult to manage your monthly bills already, taking on more debt just creates a larger problem. Instead, contact your lender to request a mortgage forbearance or a loan modification. Lenders understand that you need help when facing a temporary hardship and will work with you to avoid falling behind on your mortgage payments.
Buying depreciating assets
Think twice about using your home equity to buy a brand-new car or furniture. These items depreciate in value over time, and you can’t truly enjoy either if you lose your home.
Using a loan secured by your house to buy a car means that if, for some reason, you can’t keep up with your auto loan payments, you could lose your home to foreclosure. A home is an asset worth far more than a car, so that’s a big risk to take.
Here are some of the other major disadvantages of financing a car purchase with a home equity loan:
- Depreciation timeline. Unlike homes, cars lose their value quickly. New cars lose up to 60% of their value over five years, according to Kelley Blue Book. Since home equity loans and home equity lines of credit (HELOCs) have longer repayment terms, you risk falling underwater after your car loses value.
- Closing costs. Home equity loan closingcosts can range from 2% to 5% of the overall loan amount, which can be costly. In contrast, with an auto loan, you only have to worry about potentially making a down payment and paying some smaller dealer fees.
- Long-term cost. The longer repayment terms associated with home equity loans can mean paying far more money overall, particularly in interest charges.
In general, it’s likely a better idea to try to get the best possible rate on an auto loan instead of using a home equity loan to purchase a car.
Alternatively, if mortgage rates have gone down since you bought your home, you could benefit from a cash-out refinance. If you can secure a rate at least 50 basis points lower than your current rate, you could not only purchase a car with the loan proceeds but also reduce how much interest you’ll pay on both the home and the car.
Questions to ask before tapping your home equity
Here are a few questions to ask yourself to help you determine if borrowing against your home equity is the right option:
- Do I have sufficient home equity? You’ll typically need at least 15% home equity to qualify for a home equity loan. Home equity is the difference between your home’s current market value and your remaining mortgage balance.
- Can I afford the monthly payment? Take an honest look at your budget and overall financial situation to determine whether you can afford a home equity loan. Since a home equity loan is considered a second mortgage, you’ll now have two mortgage payments to manage each month.
- Is my credit in decent shape? Your credit score affects your eligibility for a home equity loan as well as the rate you receive. You’ll generally need at least a 620 credit score to qualify for a home equity loan, though the minimum requirements vary by lender.
- Am I nearing retirement age? Using your home equity now means you won’t have as much equity to fall back on for unexpected expenses during your retirement years.
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