The smart way to use your home equity

By using the equity in your home as a source of cash, you may be able to leverage that money in your favor for investment purposes or other financial goals.

However, it’s important to make strategic decisions regarding your home equity — both in how you access the money and leverage it — and to proceed with a disciplined approach to avoid taking a loss. Here’s what you need to know.

Cash-out refinance

This method of leveraging your home equity allows you to refinance your mortgage for an increased amount, and then you can pocket the resulting money. You will increase your debt, but you can acquire funds to make other investments or home improvements.

Home equity loans for bad credit

Sometimes referred to as a second mortgage, this type of loan is backed by your home’s equity and is much like a traditional mortgage. You receive the money in a lump sum, and the loan is paid back to the lender at a fixed rate over a set period of time. Depending on your circumstances, you may qualify for home equity loans for bad credit.

Home equity line of credit

This method of leveraging your home equity functions much like a credit card. Instead of receiving a lump sum of money as with a home equity loan, you can access money over and over again against your equity.

A home equity line of credit, or HELOC, doesn’t have closing costs and is easy to use, often with a debit card or checks. As with a credit card, you must pay the balance.

Home upgrades

You can increase your home’s value and therefore your equity with home improvements. Making your home more energy-efficient, for example, can increase your home’s value.

However, a bathroom upgrade or an outdoor hot tub may cost you more than the value it will generate. You may want to consult with someone with expertise in home renovations to determine if a home upgrade is likely to give you a solid financial return on your investment.

Real estate investing

Through smart real estate investing, you can leverage your home equity to produce additional income. However, it is important to understand the risks involved in buying an investment property.

If you’re new to real estate investing, seek the advice of someone who’s an experienced real estate investor so that you’ll use your home equity to your advantage. A bad real estate investment in which your home equity is the collateral could mean that you could lose your home altogether.

Debt consolidation

Debt that carries a high-interest rate can be consolidated using your home equity. However, it’s a good idea to take a realistic look at your existing high-interest debt. Did it accumulate because you made purchases that you couldn’t afford?

If so, you may need to focus on limiting your spending habits before tapping into your home equity. Otherwise, you could end up with even more debt in the long run.

However, if you have a period of unemployment, for example, your home equity can be a safety net that provides you with a low-interest way to pay your bills during a financial setback or emergency.

By using your home equity to make smart investments, home renovations or debt consolidations, you can leverage your equity funds to reach your financial goals. Before making these important decisions with the money that’s accruing on your home, consider discussing your financial decisions with a trusted financial advisor.