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MoneyWatch: Managing Your Money
By Angelica Leicht
Edited By Matt Richardson
/ CBS News
Over the last few years, the housing market has been anything but typical. A mix of elevated home prices, low levels of inventory and a high mortgage rate environment have led to buyers paying a lot more for the homes that they purchase — and has also led to a rapid rise in home equity levels. So, while many potential homebuyers are feeling the pain from today's housing market, current homeowners are sitting pretty on piles of equity.
Right now, the average homeowner has about $200,000 in tappable equity in their home. You can borrow against your home's equity to pay off high-interest credit card debt, make a big purchase, cover unexpected expenses or for something else entirely. And, what's attractive about borrowing against your home equity is that home equity loan rates are typically much lower than what you'd get with a personal loan or credit card.
Home equity loans aren't your only option for tapping into your home's equity, either. You can also borrow from your equity with a home equity line of credit (HELOC), which is a revolving line of credit that is secured by the equity in your home. What you may not realize, though, is that — in addition to its other uses — this type of home equity lending product can also be a powerful financial tool for building wealth and achieving financial goals. Here's how.
Learn more about the HELOC rates you could qualify for here.
6 easy strategies to build wealth with a HELOC
There are a few different (and simple) ways that you can use a HELOC to build wealth, including:
Home improvements
One of the most common and practical uses of a HELOC is for home improvements. By investing in renovations and upgrades that increase your home's value, you are effectively building wealth in the long run.
A higher home value means greater equity, which can be realized when you eventually sell your home. It's essential to choose projects wisely, though, focusing on those that offer a strong return on investment.
Explore your top home equity loan and HELOC options here.
Debt consolidation
Another strategy for building wealth with a HELOC is to use it for debt consolidation. By paying off high-interest debts like credit cards and personal loans, you can reduce your overall interest payments and save money in the long term. This strategy frees up additional funds that can be redirected toward investments or other wealth-building activities.
Investment opportunities
One of the most intriguing ways to use a HELOC for wealth-building is to invest in income-generating assets. You can use the funds from your HELOC to invest in real estate, stocks or other income-producing investments.
This strategy involves risk, though, and it's essential to conduct thorough research and seek professional advice when you need it. But if the returns on your investments exceed the interest rate on your HELOC, you can potentially build wealth through passive income and capital appreciation.
Emergency fund
While using a HELOC for investments or other wealth-building activities is enticing, it's also crucial to have a financial safety net. Using a portion of your HELOC as an emergency fund can provide peace of mind. In case of unexpected expenses, you'll have a readily available source of funds, which can help you avoid going into high-interest debt — thereby making it easier to build wealth slowly through your savings or investments.
Education and skill development
Investing in your education and skill development can also be a valuable wealth-building strategy. Using your HELOC to finance courses, certifications or degrees that can increase your earning potential can pay off in the long run. And, a more lucrative career or the ability to start a side business using the funds from your home's equity can contribute significantly to your wealth.
Tax advantages
HELOC interest can be tax-deductible, depending on your jurisdiction and the specific purpose of the loan. Consult with a tax advisor to understand how this deduction can benefit your financial situation. While it likely won't help you build wealth directly, this tax benefit can further enhance the wealth-building potential of a HELOC.
The bottom line
A HELOC can be a versatile tool for building wealth when used wisely. However, it's essential to approach HELOC strategies with caution and planning. Before utilizing a HELOC, carefully consider your financial goals, risk tolerance and the potential return on investment. You may also want to seek advice from financial professionals, such as financial planners and tax advisors, to ensure you make informed decisions. But by using a HELOC strategically, you can leverage the equity in your home to build wealth and secure a more prosperous financial future.
Angelica Leicht
Angelica Leicht is senior editor for Managing Your Money, where she writes and edits articles on a range of personal finance topics. Angelica previously held editing roles at The Simple Dollar, Interest, HousingWire and other financial publications.
