When you have equity in your property, you have leverage that you can use in a variety of situations. You may use your equity to help cover expenses, complete home renovations, or even invest in a new property.
Take a closer look at the top reasons to use your equity in obtaining a new loan.
Emergencies That Require Significant Funds
Emergencies are unexpected. While financial experts advise Australians to save money to prepare for these unforeseen expenses, most people do not have the savings necessary when major life emergencies occur.
For example, you may need a large amount of money to cover medical expenses. You may also require funds when you suddenly lose a job. When these situations arise, a home equity loan may help you get through the emergency without losing your home or taking on additional debt.
How Do You Know How Much Equity You Have?
While you may be interested in using your equity for one of the situations discussed, you first need to determine how much equity you have available. The best way to calculate your current equity is to use an equity calculator. Receive a more accurate estimate before you explore the idea of using it to take out a loan.
Home Renovations That Add Property Value
Many homeowners choose to use their equity to fund their home renovation projects. Using equity can be a good or bad idea, depending on the renovations that you want. Typically, using equity to finance home improvements is only recommended when the upgrades add value to your property.
Kitchen or bathroom renovations, new roofing, or adding energy efficient upgrades can help boost the value of your property. These are smart investments, as you are using the equity in your home to increase its value. However, adding a pool or spending too much on a renovation may not help you recoup the costs.
Consolidating Debt with High-Interest Rates
Another potential reason to use your home equity is to consolidate your debt. However, this is only advised for high-interest debt. Consolidating with a lower interest rate can result in significant savings while helping you pay off your existing debt.
Buying an Investment Property with Your Equity
You may also choose to use the home equity from one property to purchase another. However, you need to be careful when using your equity to fund an investment property.
The amount of rent that you collect from your tenant should exceed the repayments for your home equity loan and the cost of the home loan for the investment property.
Reasons Not to Use Your Home Equity
The reasons discussed are about the only reasons that you should consider using your home equity. There are also plenty of reasons not to use your equity.
For example, you should not tap into your home equity to buy luxury items, such as cars or electronics. The value of these items depreciates over time, unlike your property. You should also avoid using your equity to cover necessary living expenses, such as groceries and bills.