7 great ways to build wealth with a home equity loan
For many homeowners, their property is not just a place to live, but also a valuable financial asset. One way to tap into the wealth potential of your home is through a home equity loan.
And, this is a great time to consider borrowing against your home equity. Not only are home equity loan rates lower than the rates you can get on most other lending products — whether it's credit cards, personal loans or something else entirely — but the average homeowner currently has a lot of tappable equity — about $200,000 — in their home.
If you're one of them, it may be worth considering using a home equity loan to build more wealth. By leveraging the equity you've built in your home, you can access funds that can be strategically invested to build wealth over time — and there are a few strategic ways you can do that.
Explore the home equity loan rates you could qualify for here.
7 great ways to build wealth with a home equity loan
You have numerous options for growing your wealth with a home equity loan, and some of the better ones include:
Make home improvements
Investing in home improvements is one of the most popular and sensible ways to use a home equity loan — but what you may not realize is that using your home equity for this purpose can also help increase your wealth. By upgrading your property, you not only enhance your living space but also increase its value — provided that you choose the right renovations.
Remodeling kitchens and bathrooms or finishing a basement are examples of projects that can significantly boost your home's value (and therefore your equity). This higher value can translate into a more substantial return on investment when it comes time to sell.
Find out today's top home equity loan rates here.
Use it for debt consolidation
Consolidating high-interest debt with a home equity loan can be a financially savvy move — and it can also help you build your wealth, even though you aren't directly investing in renovations or other types of investments. By paying off credit card debt, personal loans or other high-interest obligations, you can free up cash flow and reduce your overall interest costs.
This can be particularly beneficial if the interest rate on your home equity loan is significantly lower than the rates on your existing debts. And you can put the money you save into other revenue-generating opportunities, whether you're investing in a certificate of deposit, putting it in a high-yield savings account to earn interest or buying stocks.
Finance real estate investments
For those with higher risk tolerance and a knack for real estate, using a home equity loan to invest in additional properties can be a lucrative strategy. You can purchase rental properties, fix and flip homes or invest in real estate crowdfunding platforms — or another similar opportunity in the real estate market.
The income generated from rental properties or the potential profit from flipping homes can then contribute to your overall wealth-building goals.
Put it toward education and skills development
Investing in yourself is one of the most valuable forms of wealth-building. Home equity loans can be used to fund higher education, vocational training or certification programs, and while it varies by degree or certification, it's usually a strategy that pays off.
Acquiring new skills or qualifications can lead to higher earning potential in your career, as well as better job opportunities, ultimately increasing your wealth over the long term.
Start or expand a business
It can also make sense to turn to a home equity loan to fund the launch or expansion of their businesses. Whether it's a small startup or a side hustle, investing in a business venture can yield significant returns if well-executed.
Just be sure to have a solid business plan in place and consider the potential risks before using your home equity for this purpose. This can be a lot riskier than some of the other strategies, but it can also result in some of the highest returns if done right.
Investment portfolio diversification
Another way to build wealth with a home equity loan is by diversifying your investment portfolio. You can use the borrowed funds to invest in stocks, bonds, mutual funds, gold or other investment vehicles. This strategy can be effective if you believe that the returns on your investments will outpace the interest on your home equity loan.
Earmark it for an emergency fund or cash reserve
Building an emergency fund is a fundamental aspect of financial security. And, a home equity loan can serve as a backup source of funds in case of unexpected expenses or emergencies. While not directly an investment, having this financial cushion can prevent you from going into debt or tapping into higher-interest resources during challenging times. That, in turn, leaves more opportunities for wealth-building outside of your home equity loan funds.
What to consider before borrowing with a home equity loan
Your home equity can be a smart source of funding for building wealth, but before you rush to use a home equity loan for this purpose, it's essential to consider the following:
- Your risk tolerance: Assess your risk tolerance and financial goals to determine the most suitable wealth-building strategy.
- Current interest rates: Pay close attention to interest rates and loan terms to ensure that the potential return on your investments outweighs the borrowing costs.
- Your financial discipline plan: Be sure to have a clear plan in place to manage the borrowed funds effectively and avoid overleveraging your home.
- Whether you should consult a financial advisor: It can be wise to consult a financial advisor to discuss your specific circumstances and explore the best options for your situation — especially if you're taking a gamble by using the money for a business or another slightly risky purpose.
The bottom line
Home equity loans can be a valuable tool for building wealth, but they should be used judiciously and strategically. Whether you choose to invest in your property, consolidate debt, start a business or expand your investment portfolio, careful planning and prudent financial decision-making are essential. By harnessing the power of your home's equity, you can pave the way to a more prosperous financial future.
