Home equity loans are used to strengthen long-term financial prospects. Depending on your goals and values, this could translate to a vacation villa or nurturing a nest egg—anything, according to experts, other than funding basic living expenses or throwaway luxuries.
With that in mind, here are some ways to leverage your equity toward enhancing your family’s security and wealth.
Make Home Improvements
Top of the list is property improvements. Remodeling projects can be among the smartest ways to use your loan proceeds because:
- Results boost property value, providing immediate equity regrowth
- Home equity loan interest is tax-deductible if used on substantial improvements
- The right improvements can equal higher profits when you sell
Top projects that boost home value include:
- Installing a new garage door
- Adding manufactured stone veneer
- Updating your entry door to steel
- Minor kitchen remodeling
Become a Landlord
It’s not an easy prospect, but if you have the skills, interests, or connections to support the process, consider buying a rental unit. You’ll need to:
- Research, locate, and purchase the property
- Decide between hands-on management and contracting out
- Maintain and repair the building, grounds, and appliances
- Manage the administration of tenant relations, taxes, and accounting
Income potential depends on location, occupancy rates, and rental type. While successful landlords aim for a cash flow (or ongoing profit) of 10% – 15% (plus long-term profits in a future sale of appreciated property) the average cash flow is around 8%.
Grow Your Investments
Learning the basics of investing is well worth it, no matter where you are in life. Borrowing against your home equity and investing the proceeds can pay off if you:
- Compare the loan cost (interest you pay) against the investment yield (interest you earn)
- Take loan closing costs and investment fees into account
- Understand how long your funds will be tied up and penalties for early access
With the prime rate reaching a two-decade high of 8.5% in mid-2023, your success with this option will likely hinge on a combination of factors:
- High credit score and solid financial picture
- Credit union that offers low loan rates
- Investment opportunity with a reliable rate of return—10% or higher
Pay Off High-Interest Debt
Just as with investment opportunities, do the math on paying down high-interest credit cards, auto loans, or other debt. You’ll need to:
- Obtain a significantly lower rate than your current debt
- Take loan closing costs and any debt prepayment penalties into account
- Change your spending habits to avoid repeating the cycle
Start a Business
How about funding a start-up or buying a successful local business? Lay the groundwork with business planning that includes:
- Market research
- Profitability analysis
- Financial planning
- SWOT (strengths, weaknesses, opportunities, threats) analysis
If you’re still at the drawing board but know you want to work for yourself, consider these entrepreneurial ideas for 2024:
- Content, marketing, and SEO optimization businesses that leverage AI
- Virtual or live event planning
- Professional organizing, downsizing, and green cleaning
- Aging-at-home, home care, and related senior services
Pay for Wealth-Building Education
Borrowers often use home equity to finance educational costs, but take an objective look at your return on investment before filling out an application. Tuition costs have gone through the roof in the last 40 years, with a 180% increase from 1980 to 2020.
At the same time, universities have multiplied their offerings in courses and degrees with a negative net benefit. Before you commit to an educational plan, evaluate:
- Full costs of a specific certificate or degree
- Total cost of interest over the life of any student loans
- Job outlook, earning potential, and current salaries by degree-holders
- How location, years of experience, and specialty impact that salary outlook
Shop for Your Next Home
If you’re looking for a new home, a current home equity loan can speed the process and strengthen your profile as a prospective buyer. Loan proceeds can help you:
- Make a bigger down payment
- Eliminate private mortgage insurance (PMI)
- Pay for mortgage points and closing costs
- Fund moving costs
Or—with a big enough loan—you could skip the financing contingency and beat out other prospective buyers with a cash offer.
Ready to Shop for a Home Equity Loan?
Northern New Jersey residents can start the process at the best credit union in NJ.
North Jersey Federal Credit Union (NJFCU) is a not-for-profit organization that offers our members low loan and credit rates, low fees, and the best in customer support. We’ve provided banking and loan solutions that help our members keep and grow their money since 1936.
To learn more, check out NJFCU’s home equity loan rates and terms.
Sources:
Bankrate. Are home equity loans tax-deductible? https://www.bankrate.com/home-equity/home-equity-loan-tax-changes/
Steadily. What is the Average Cash Flow on a Rental Property? https://www.steadily.com/blog/what-is-the-average-cash-flow-on-a-rental-property
Forbes Advisor. College Tuition Inflation: Compare The Cost Of College Over Time. https://www.forbes.com/advisor/student-loans/college-tuition-inflation/
FRED. Bank Prime Loan Rate Changes: Historical Dates of Changes and Rates. https://fred.stlouisfed.org/series/PRIME