5 Ways to Financially Benefit from Your Home
02/12/2019 Alena Savchenko
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As your home’s value rises, it can be tempting to tap into the equity you’ve built as a source of cash. In 2018, more than 44 million U.S. homeowners had access to the highest amount of home equity in history — around $6 trillion.
Knowing how you want to use your equity will help determine which type of refinancing options you should explore, like a Cash-Out Refinance. Home equity is typically used for personal expenses, home improvements and debt consolidation, according to a large-scale Federal Reserve report, one of the most comprehensive reports of its kind.
Here’s a round-up of ways to use your home’s worth for financial benefit:
1. Consolidate Debt
“[Refinancing] can also be used to pay off high-interest debt, such as credit card debt or personal loans,” Ma says. The average credit card interest rate is around 19.24%, according to a survey from WalletHub, with store credit cards averaging around 25.74% — almost five times the current interest rate on a 30-year fixed rate home loan.
Paying down debt can also boost your credit score. But don’t treat a cash-out refi like an ATM. Have a plan in place to avoid further debt. “For example, as part of this plan, you could decide to stop using credit cards,” Ma says. “Only use debit cards and cash moving forward, to ensure you're only spending money you have.”
2. Home Improvements
Some of the pricier home improvement projects also help boost the value of your home, so using equity can pay off, long-term. But check the remodel return on investment before tapping your home’s equity for upgrades.
Some popular home improvement projects increase personal satisfaction, too. A kitchen remodel runs between $15,000 to more than $30,000, depending on whether you go for state-of-the-art appliances and granite countertops or more affordable alternatives, in the opinion of HomeAdvisor.com. The site also states: “Homeowners should plan to spend between 5% to 15% of their home’s total value on a kitchen remodel, as this is the optimal range for homeowners to spend and expect to recoup at resale.”
3. Exterior Improvements
“I’ve been seeing a lot of folks focusing on exterior improvements,” says architect Bud Dietrich, a Tampa Bay, Florida-area architect. “They’re looking to add curb appeal and make their home more personal and less generic.” Projects include adding wrap-around porches, or detailed trims and finishes when replacing windows and siding, he says.
Requests for overall landscape upgrades and management are on the upswing in the last year, as stated in a 2018 survey of realtors. These projects add value for potential homebuyers, and may offer good long-term investments. Even standard lawn care service (such as controlling weeds and fertilizing grass) recovers 267% of its value, as outlined in the report.
Other projects that appeal to both homeowners and homebuyers include tree care, fresh paint and a new wood deck.
If you have good credit, cash reserves, and other qualifications, the equity in your home could be used to purchase an investment property.
A single-family home, townhouse or multi-family unit can be a long-term asset, offering additional tenant income. Or you can purchase a place to appropriately renovate and flip, selling it for more than you paid. A vacation home can provide a reliable getaway that appreciates over time — and you can put as little as 10% down.
5. Higher Education
“Using a lump sum home [refinance] loan or line of credit could be a good way to fund a child's education or your own,” says Roger Ma, a licensed real estate agent, certified financial planner, and founder of lifelaidout.com. “Before pushing forward, make sure interest rates and fees would be lower, if going the home equity option versus taking out student loans.”
This may be particularly appealing if you wish to return to school for an advanced degree. For example, a direct unsubsidized loan from the U.S. government for your own graduate or professional degree is 6.6% as of July 2018. A PLUS loan for parents of a graduate student is 7.6%, as shown on the Federal Student Aid site. Private student loan interest rates are often even higher than the aforementioned government loans. But current cash-out refinance rates are around 5% for a conventional 30-year fixed loan.
“In all scenarios, make sure that the additional loan payments you'll be responsible for can fit within your existing budget,” Ma says.
Interested in learning more about refinancing? Visit PennyMac’s Cash-Out Refinancing blog article to learn more about the pros and cons of refinancing.
To find out if you can benefit from a refinance, plug in the numbers to a loan calculator or check out our home value estimator. If you are ready to start the process, apply today using our online application or contact a PennyMac Loan Officer.
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