Home equity may offer less expensive options to pay down debt or cover expenses

After a volatile first quarter, U.S. consumers aren’t feeling great about the economy as fears of more inflation and a slowing economy loom. It's tempting to turn to credit cards to cover expenses. However, you're likely not making the most economical decision if you've owned your home for a while. Instead, a better option may be to tap your home equity, especially given growing credit card interest rates, said Kurt Morris, home loans product manager at BOK Financial®.

“Housing equity growth slowed in 2024 versus 2020-2023 due to moderating price appreciation, but homeowners maintain substantial equity gains from prior years, preserving their strong financial position,” said Selma Hepp, chief economist for CoreLogic.

Homeowners can tap into home equity
As of the fourth quarter of 2024, the average U.S. homeowner gained approximately $4,100 in equity during the previous year, with some states reporting slightly lower equity than the previous quarter, according to the CoreLogic's Homeowner Equity Insights Report.

Home equity is the difference between what you owe on your house and what it is currently worth, explained Morris.

Since interest rates on home equity products tend to be lower than the interest on other types of consumer debt, they can be a good way to pay for expenses or to pay down more expensive debt. Here are some possible uses:

Pay for school
Leveraging your home equity can be used to cover educational expenses like university or trade school tuition, books and housing, or even to pay down student loans. However, the latter option should be considered carefully, Morris said.

"Paying off student loans using home equity could provide lower interest rates and reduce the amount you pay overall," he explained. "However, you'll want to review both the risks and rewards before transitioning from student loans to home equity borrowing options."

Morris suggests reviewing all federal student loan forgiveness programs you qualify for and how your private student loan rates are structured. Be sure to note that you could lose federal forgiveness opportunities if you consolidate your debt with a home equity line of credit (HELOC).

Pay down your credit card balances
The average credit card interest rate was 28.7%, as of March 17, according to Forbes Advisor's weekly credit card rates report. "Accessing home equity through a line of credit could be a good option to pay down or consolidate debt," Morris said. "Lowering your interest rate is critical for debt reduction."

Cover medical bills
Life happens and sometimes unexpected medical expenses come up. Hopefully, health insurance will cover some of the costs, but a home equity line of credit could cover your deductible and other out- of-pocket expenses. If you anticipate additional medical expenses in the future, a HELOC can be opened and only used as needed, Morris said.

This line of credit typically has an open period that extends quite a while–sometimes up to 10 years–before it closes. When you access funds from the line of credit for any purpose during that time, monthly payments will be required based on the current interest rate.

Start a business
If you have a great business idea, but no start-up capital, you may want to consider using the equity you've built in your home to start or grow your own business.

Morris suggests starting by comparing a cash-out refinance with a small business loan to see which offers more benefits to you. Then, proceed with caution. If your business idea turns out to be more of a Cheetos Lip Balm (yes, that was an actual product) than a Chapstick, you could lose the money and be left with no equity in your home.

Invest in property
You could also use a cash-out refinance or HELOC to help you buy an investment property or a second home.

"Second home-loan interest rates and investment property interest rates are higher than primary home rates, in most cases," cautioned Morris. "But suppose you have enough equity in your primary home to cover the cost of your second home or an investment property purchase. In that case, you can make a cash offer and avoid the higher interest rate and higher closing costs altogether."

Home renovation or repair costs
If a recent storm damaged your roof or you're looking to build a new home office but don't have cash readily available, then a home equity line of credit may be a good option. In fact, one of the most common uses for home equity is for renovations through a HELOC—and it may even help you save on your income taxes.

"In certain cases, interest paid on equity-related products could be tax deductible," said Morris. "It is always prudent to consult with a tax professional to review your individual tax situation as it relates to your home equity."

Borrowing against your home's equity to improve your space may also be worth it, especially if you love your location or moving is out of the question.

Where to start
Morris recommends working with a trusted lender to figure out how much equity you need in your home before you can borrow against it. "Each lender is different, but most require somewhere between 10% to 20% equity," he said. "Then choose the best equity option for you and review the rates, loan terms and other fees."

Then, how you use that money is largely up to you. "As long as it's legal, you can use the money for any purpose—whatever you want or need," said Morris. "Home equity gives you a lot of options."