Putting your home equity to work

If you’re considering using credit cards to cover a large expense or to make ends meet during a job loss or other life transition, you may not be making the most economical decision if you've owned your home for a while. A better option may be to tap your home equity, especially given high credit card interest rates, said Kurt Morris, manager of product strategy at BOK Financial®.

Home equity is the difference between what you owe on your house and what it is currently worth. There are a few ways that homeowners can tap into this equity, so Morris suggests working with a mortgage advisor to understand the differences between the options and what’s best for you. These options include:

Home equity lines of credit (HELOCs)

HELOCs give you access to a line of credit that you can tap into as needed for a set duration of time called a draw period. HELOC interest rates are adjustable, meaning you may see increases or decreases over time, and the line of credit will show up on your credit report.

Cash-out refinancing

This option replaces your existing mortgage with a new one. You use the loan to repay the original mortgage, and the remaining cash is yours to do with as you please.

Since interest rates on these home equity products tend to be lower than the interest on other types of consumer debt, such as credit cards, they can be a good way to pay for expenses or to pay down existing balances, he explained.

Here are some possible uses:

Paying for school

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 noted.

"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 HELOC.

Paying down your credit card balances

Although some credit cards offer promotions such as 0% interest for a time period, those promotions aside, credit cards tend to charge higher interest rates than many other types of loans. "Lowering your interest rate is critical for debt reduction, so accessing home equity through a line of credit could be a good option to pay down or consolidate higher-interest debt," Morris said.

Covering medical bills

Life happens and sometimes unexpected medical expenses come up. Hopefully, health insurance will cover some of the costs, but tapping into your home equity could help you 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 as high as 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.

Starting 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 doesn’t turn out as planned, you could lose the money and be left with no equity in your home.

Investing in property

Many people don’t realize they can also use a cash-out refinance or HELOC to help them buy an investment property or second home. "Second home-loan interest rates and investment property interest rates are higher than primary home rates, in most cases," Morris cautioned. "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."

Covering 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 HELOC 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. "However, it is always prudent to consult with a tax professional to review your individual tax situation as it relates to your home equity."

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."