What Can You Use A Home Equity Loan For?

Did you know your home equity doesn’t have to stay locked in your home? You can tap into it and use it for a variety of reasons. Wondering what can you use a home equity loan for? We’ve got answers.

In short, you can use it for nearly anything you want – but some spending or purchases might not qualify as wise financial decisions. Knowing what home equity loans should be used for – and not used for – can help keep you from tapping into your home equity for the wrong reasons.

Home Equity Loans And How They Work

Homeowners borrow against their homes to put their equity to good use. A home equity loan is a second mortgage on your property and takes the second lien position to your primary mortgage.

A home equity loan provides a lump sum of cash that borrowers repay at a fixed interest rate. You immediately make principal and interest payments after you close on the loan.

Most home equity loans offer fixed interest rates. Your monthly payments never change for the life of the loan, which can be 10 – 30 years. Rocket Mortgage^® provides home equity loans with 10- and 20-year fixed-rate repayment terms.

Lender programs and terms will vary, so check with your lender to discuss their home equity loan offerings.

An Example

Most lenders will allow you to borrow 80% – 85% of the difference between your home’s current market value and the outstanding balance on your first mortgage.

For example, let’s say your home is valued at $300,000. If you borrowed 85% of the home’s value, the maximum loan amount you would qualify for is $255,000. When you factor in the outstanding balance on your first mortgage, which is $150,000, you’re left with $105,000 to borrow with a home equity loan.

We don’t recommend borrowing more than you need. But knowing you can access up to 85% of your home’s value can help in scenarios.

Can You Use A Home Equity Loan For Anything? The 7 Best Uses

There isn’t a right or wrong way to use your home equity loan. You earned the equity in your home and can use it how you want. However, the money you withdraw from your home is a loan, and you must pay it back with interest.

Before tapping into your home equity, make sure you can afford the monthly payments and that the reason you’re taking out the loan justifies the interest you’ll pay. If you want to pay less interest, it’s best to request the shortest term you can afford.

1. Consolidating Debt

Debt consolidation is a popular reason to get a home equity loan. When you consolidate debt, you use the loan to pay off your existing debts. You can pay off the balances yourself or work with your lender to have them disburse funds directly to your creditors.

When you consolidate debt, you simplify bill payments by combining all your debts into a single loan. You’ll have one loan payment to make each month rather than multiple bill payments. And you may have a lower interest rate compared to your existing debts.

Consolidating your debts into one easy-to-manage loan should help make budgeting and getting out of debt much easier and faster.

2. Remodeling Your Home

After debt consolidation, home renovations or remodeling is the most popular reason to take out a home equity loan.

It’s also one of the most financially savvy reasons to tap into your home’s equity. When you finance home improvements, you invest in your home. You withdraw money from your home to boost its value and resale amount. Not every home improvement will increase your home’s value dollar-for-dollar, but you’ll typically see some appreciation.

Because home equity loans provide lump-sum payments, it’s crucial to know how much the home renovations will cost before you apply. Finally, if you itemize deductions on your taxes and use the money to make home improvements or renovations, you may be able to deduct the interest you pay on the home equity loan.

3. Buying Investment Property

Using your home equity to buy an investment property can be another valuable way to use your funds. However, financing an investment property or vacation home purchase can be challenging because it isn’t a primary residence, and lenders typically require higher down payments for investment properties.

If you don’t have the capital upfront, that will delay your purchase. You can use the equity in your home to make a larger down payment on an investment property or vacation home.

4. Paying for College

If you don’t want your child to take out student loans but financial aid doesn’t cover their college costs, you can use the equity in your home to fund their higher education.

A home equity loan is typically a good idea when mortgage interest rates are lower than student loan rates. While federal student loan rates can be competitive, private student loan rates can get high. Tapping into your equity with a home equity loan may offer a lower interest rate and help you save money on college costs.

Home equity loans don’t offer special repayment programs or assistance. If you struggle to repay the loan, you won’t qualify for federal student loan debt relief, and you may lose your home if you default on the loan.

5. Building An Emergency Fund

If you don’t have an emergency fund, consider tapping into your home’s equity to create one. Ideally, your emergency fund should be able to cover 3 – 6 months of expenses.

If you use your home equity to build an emergency fund, invest it somewhere safe, such as a CD or another interest-bearing account. You should only use the funds for legitimate emergencies.

6. Becoming a Business Owner

Starting a business can help you achieve financial freedom. However, not all aspiring entrepreneurs have the capital to fund their dream of becoming their own boss.

With a home equity loan, you can get the necessary capital without paying high interest rates or jumping through hoops for loan approval. Many brand-new business owners don’t qualify for a business loan because they haven’t established a business history. A home equity loan can bridge that gap and finance various expenses such as equipment, a security deposit for a building, or marketing.

Typically, new business owners who can’t take out a home equity loan take out a personal loan or pay for everything with high-interest credit cards, which may strain their finances and potentially hinder a business’s ability to grow.

7. Investing in Yourself

One of the best investments you can make is in yourself. If your career requires continuing education courses or a return to school may increase your chances of getting a better job, a home equity loan can help you cover the costs.

You don’t have to put off professional development. You can invest in yourself and increase your chances of making more money. Use your raise or higher income to pay off your home equity loan early and maximize the benefits of investing in yourself.

What Shouldn’t You Use a Home Equity Loan For?

Most lenders don’t restrict or ask how you plan to use your home equity loan funds. However, you should be very careful about your reason for taking out a home equity loan, especially if you’re borrowing against your home to:

• Buy a car: While it’s not encouraged, you should only use a home equity loan to buy a car if you understand the cost of the loan and can afford it without putting your home at risk.
• Fund a wedding: Weddings are expensive, but covering the costs of that single day with the funds you’ve built up in your home – likely your largest asset – isn’t a good long-term use of the money.
• Make a risky investment: Your home equity is a valuable asset. Risking it on the chance that you might earn high returns can be dangerous. Even if someone promises you the investment is a sure bet, you should exercise extreme caution.

The Bottom Line

Having enough equity in your home and meeting a lender's home equity loan requirements is half of the equation. The other half is carefully evaluating your reason for getting the loan. Whether you want to invest in yourself, finance home improvements or consolidate debt, there are many valid reasons to access home equity with a home equity loan.

The loan should help you achieve your present and long-term financial goals. And you should only borrow what you can afford so the loan doesn’t strain your budget.

A home equity loan can be a powerful tool when it aligns with your goals. If you’re ready, Start an application online and see what you qualify for.