You can practice financial planning & wealth building by using assets you own, like your home! Learn how to utilize your home equity for wealth creation.
Building wealth requires a certain mindset and select financial tools. In sum, you need to make your money work for you. One way to do this is to leverage your home equity—the portion of your home that you own outright and that’s available for you to use as you choose.
You can convert equity to cash through either a sale or a loan, which can then be used in multiple ways, including investments in stocks, bonds, real estate, and business opportunities.
By converting equity to opportunity, you can grow your total assets and sources of income. Let’s take a closer look at how to use home equity to build wealth based on your goals and resources.
Home equity can be a powerful tool for financial planning, but it’s important to understand how it works before trying out this strategy.
Equity is the portion of a home's value that the homeowner actually owns. The basic calculation works by taking the current market value of your home and subtracting the total you still owe on it to lenders or lien-holders. The amount left is your home equity, which you can either receive when you sell your property or access by using it as collateral in some type of secured loan, such as a home equity loan.
So, how can you make that cash work for you and work your way toward financial freedom?
Whether you’re ready to ditch white-collar life and buy a franchise, fund a start-up, or take advantage of home-based tax write-offs with a new side hustle, you can use your home’s equity to fund it. If you’re just starting to explore the idea, keep in mind that some types of businesses take years to bring in a profit.
Be sure to protect your assets with:
A common reason borrowers have for taking out home equity loans is to fund property improvements and upgrades. In general, building up equity in your home is based on:
The fourth and optional way to grow equity is to enhance your property with remodels and additions. Remodeling doesn’t usually provide a 100% return on its cost, but if you invest in upgrades that both enhance your current enjoyment of the property and add value to it, you’ll be building security and future wealth.
Consider these popular remodels, and how much you can expect to recoup from them based on national averages:
You may also be able to deduct home equity loan interest from your federal income taxes if the loan proceeds are used to "buy, build or substantially improve the taxpayer's home that secures the loan,” according to the IRS.2
Happy with the return on your investment in homeownership so far? You can build wealth by extending the cycle and using the equity in your home to invest in other property types such as:
While you’ve missed the 2020–2021 drop in interest rates, 30-year fixed mortgage rates continue to be a profit-generator for the long haul, especially if you own a rental property that produces enough revenue to provide you with monthly income.3
Let’s do a mash-up of #2 and #3 above—have you considered designating or building space you can rent out on your land? This could include:
A contained living space on the same lot as a detached single-family home is also called an accessory dwelling unit (ADU). If you already have a structure or the space to convert—and are willing to deal with renters—you may be able to boost your equity immediately by more than the construction cost.
For instance, a garage conversion ADU costs $100,000–$150,000 to make tenant-ready, while adding the ADU increases property value by $158,000 on average.4
One method of wealth creation is to reduce, eliminate, and then avoid high-interest debt. If you’re making monthly payments (or should be) on debts that charge a higher interest than an equity-based loan, you may save in the long run by using equity to pay them off.
These may include:
You could take out a home equity loan with a lower APR and minimal fees to pay off outstanding loans, effectively consolidating your debt under a single loan secured by your property.
Consider reaching out to a non-profit credit counseling organization for free information or guidance prior to seeking secured loans to pay off credit card debt—they can advise you on managing your money, debts, and a budget, as well as your consumer rights related to debt consolidation and collection.5
Part of understanding how to convert equity to wealth is comparing interest rates, just like the example of high-interest debt above. It may seem counterproductive to take out a loan that you pay interest on just to turn around and buy products that essentially pay interest back to you. But based on differing rates, borrowing to invest can be lucrative with the right expertise.
Depending on the range of time you look at and whether you index for inflation, the average annual U.S. stock market return is between 7% and 14%, although 10% is a rule of thumb that many financial planners use.6 Bonds tend to provide less return but at less risk, with fixed-rate interest income.7
As of mid-October 2022, the average interest rate for home equity loans is 7.29% and for HELOCs is 7.3%.8 There is profit potential of that window between 7.29% interest on your loan and 10% return on the stock market. But is this a wise move?
Be sure to consider:
If borrowing against equity to invest is something you’re considering, work with a financial planner and consider your level of both risk and knowledge. Some recommend that you:
When you consider that you can take 2,500+ online courses sourced from the world's top universities on edX, the platform founded by Harvard and MIT to democratize learning, there’s never been a better time to skip the debt of a college degree and seek out knowledge directly.10
But if you do your homework, you can find educational paths to significantly increase your current income. Be sure to research:
Considering a sale or refinance to access home equity? If you’re ready to convert equity to cash but want to continue living in your family home, Truehold's Sale-Leaseback option may be right for you. Instead of moving, you can sell your home to us at a competitive price and then lease it back for as long as you want.
Whether you’re looking to build or preserve wealth, cashing out home equity can provide funds for business opportunities, to fuel income-generating trusts, or eliminate debt left to heirs.
You may also be able to reduce monthly housing costs. As a renter, you won’t be responsible for homeowners liability insurance, property tax, or major repairs and covered maintenance—those are all covered by Truehold.
Ready to learn more? Give us a call and one of our advisors will reach out to review your finances, goals, and credit score to determine if Truehold is the right option for you to access your equity without leaving your home.
1. Remodeling. 2022 Cost vs. Value Report. https://www.remodeling.hw.net/cost-vs-value/2022/
2. IRS. Interest on Home Equity Loans Often Still Deductible Under New Law. https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law
3. FRED. 30-Year Fixed Rate Mortgage Average in the United States. https://fred.stlouisfed.org/series/MORTGAGE30US
4. Homestead. ADUs: The Best Investment You Can Make in 2022. https://www.homestead.is/learning-about/adus-investment-potential
5. Consumer Financial Protection Bureau (CFPB). What is credit counseling? https://www.consumerfinance.gov/ask-cfpb/what-is-credit-counseling-en-1451/
6. Titan. What Is the Average Historical Stock Market Return? https://www.titan.com/articles/average-stock-market-return
7. The Balance. Why Do Bond Prices Go Down When Interest Rates Rise? https://www.thebalancemoney.com/why-do-bond-prices-go-down-when-interest-rates-rise-2388565
8. Bankrate. Current home equity interest rates. https://www.bankrate.com/home-equity/current-interest-rates/
9. CNBC. Investing with borrowed money can be a big win — for some. https://www.cnbc.com/2018/01/24/investing-with-borrowed-money-can-win-big--for-some.html
Business Insider. 38 free Harvard courses you can take online right now. https://www.businessinsider.com/guides/learning/harvard-free-online-courses
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