Beyond Renovations: What Else Can Home Equity Help Pay For?

A new roof or a college tuition payment can put pressure on a household budget, even if you’ve planned carefully. If you’ve owned your home for a while, home equity may give you another way to cover a significant need while keeping some savings available.

Home equity is the difference between your home’s current value and what you still owe on it. For example, if your home is worth $400,000 and your outstanding balance on your mortgage is $250,000, you have $150,000 in equity.

Once you’ve built equity, you may be able to borrow against a portion of it to help cover a major expense. How you access those funds depends on the type of home equity financing you choose.

Two Ways to Access Your Home Equity

Homeowners generally have two common ways to borrow against the equity they’ve built: a home equity loan or a home equity line of credit.

Fixed-Rate Home Equity Loan

A fixed-rate home equity loan provides a set loan amount with a fixed interest rate and monthly payment. A steady payment schedule may make budgeting easier when you have a one-time expense, such as a renovation or tuition bill.

Home Equity Line of Credit

A home equity line of credit (HELOC) lets you borrow from an approved amount as you need it, rather than taking the full amount at once. You’ll pay interest on the amount you use. When a HELOC has a variable rate, the payment can change as the applicable rate changes.

A home equity line of credit may be a good fit for expenses that arrive in stages. Because rates can change, use the rate available when you apply to estimate how the payment could work with your other monthly expenses.

Putting Your Home Equity to Work: 5 Common Uses

Homeowners may choose to use home equity to cover a range of larger expenses, from planned projects to needs that come up unexpectedly:

1. Put Renovation Plans on Firmer Financial Ground

When a family member’s needs change, updates that make your home safer and easier to use can become a priority quickly. Wider doorways, a walk-in shower, entry ramps, or changes to a main-floor living space may all be part of making the home work better for everyday life.

Start by identifying which improvements would make the biggest difference now. Written estimates can help you understand the likely cost, while a little extra room in the budget can account for changes that come up once work begins.

Think about how the project will support your household over time. An accessibility renovation may help someone remain more independent at home and make daily routines easier for the people who live there.

2. Bring Several Debts Into One Payment Plan

Keeping up with several balances can get complicated when each one has its own due date and interest rate. Debt consolidation may let you combine qualifying balances into one payment, which can make the payoff process easier to track.

Before using home equity for consolidation, compare the new rate, any fees, and the repayment term with what you’re paying now. A lower rate may help, although stretching the debt over a much longer period could increase the total amount you repay. A home equity loan or HELOC also uses your home as collateral, so that tradeoff deserves careful consideration.

If you’d rather consolidate without borrowing against your home, a personal loan may be worth comparing. Whichever option you choose, have a plan for the accounts you pay off so new balances don’t build alongside the consolidation loan.

3. Compare Education Funding Before Using Your Home

College costs can be easier to plan for when you know the amount due and the timing. If you’re considering home equity for tuition or other education expenses, start by looking at the funding already available to the student, including scholarships, grants, and federal student aid.

Federal student loans may come with repayment options or borrower protections that a loan secured by your home doesn’t offer. Comparing those differences can help you decide whether home equity belongs in the mix or whether another source of funding makes more sense.

Your own financial goals matter too, especially if retirement is getting closer. Before taking on a new payment, consider how it could affect the money you’re setting aside for retirement and the savings you want to keep available.

4. Cover a Major Planned Expense Without Emptying Savings

Even when you know a major expense is coming, paying for it all at once can put pressure on your savings. If you have to pay for a scheduled medical procedure, for example, using some home equity can allow you to spread the expense over time while keeping part of your cash reserve available.

Before borrowing, decide how much you’re comfortable paying from savings and how much you can reasonably add to your monthly budget. Using some cash for a portion of the procedure’s cost may lower the amount you need to borrow without leaving you short for other priorities.

5. Keep Unexpected Needs From Taking Over the Monthly Budget

A sudden home repair for a problem like a burst pipe can turn into more than one bill. You may need to pay for the plumbing repair first, then deal with water damage or replace materials once the full extent of the problem is clear.

When an emergency expense develops in stages, a Home Equity Loan can let you borrow as costs come up rather than taking a larger lump sum upfront. That can be useful when you know the repair can’t wait but don’t yet know the final total.

For smaller surprises, emergency savings may be enough to cover the expense without taking on debt. Keeping some cash set aside in an emergency fund can also give you more flexibility if a larger repair requires both savings and borrowed funds.

Is Using Your Home Equity the Right Move?

Using home equity can help cover a major need, but it’s worth considering how the decision may affect your home, future plans, and overall borrowing costs.

• Are you comfortable using your home as collateral? Home equity loans and HELOCs are secured by your property, so repayment remains important throughout the life of the loan.
• How long do you expect to stay in the home? If you may sell or refinance in the near future, consider how an outstanding home equity balance could factor into those plans.
• What will borrowing add to the total expense? Look at interest, applicable fees, and the repayment period so you understand what you may ultimately pay to finance it.
• How much equity do you want to leave untouched? You don’t have to borrow the maximum amount available. Keeping some equity in your home may give you more flexibility later.

Looking at the bigger picture can help you decide how much equity, if any, you’re comfortable putting to work.

What Happens When a HELOC Draw Period Ends?

If you choose a HELOC instead of a fixed-rate home equity loan, one part of the timeline deserves special attention: the end of the draw period. During the draw period, you can borrow from your available credit as needed, up to your approved limit.

Once the draw period ends, new advances stop. You then begin repaying the remaining balance based on your repayment schedule. Depending on how much you still owe, your monthly payment may be higher than it was during the draw period.

A few months before that change, review your balance and expected payment. Knowing what’s coming gives you time to work the new amount into your budget before repayment begins.

A $0 Balance Can Mean Different Things for Different Home Equity Products

When a fixed-rate home equity loan reaches a $0 balance and you’ve made all required payments, you’ve repaid the loan. Keep your final payoff confirmation with your home records.

With a HELOC, a $0 balance doesn’t always mean the account is closed. If you’re still within the draw period, the line can remain open for future borrowing even when you don’t currently owe anything.

If your goal is to close the HELOC completely, check with your lender about any steps required to close the line.

Put Your Home Equity to Work With a Clear Plan

Home equity can support an important expense when the amount you borrow fits your budget and the repayment structure fits the need. Seeing how those pieces fit together can help you choose a financing option with fewer surprises later.

Interior Federal offers both fixed-rate home equity loans and HELOCs, giving members a choice between a steady payment and more flexible access to funds. Our team can also help you understand how each option works and what to expect during the application process.

If you’re considering putting your home equity to work, review the differences between the two options and get in touch with us if you have questions about which structure may fit your plans.

Looking for some lower cost updates you can make to get the biggest bang for your buck? Read our blog about the best 4 home updates to make and how a home equity loan can help you.