Your home is not just the cherished place you live. It is a valuable asset that can bring you opportunities for financial security and growth. Owning a home helps you build equity, and in turn, wealth, providing an option when you need to access funds. But there are other ways you can use your home as part of your financial strategy. Let's explore how you can put your home to work for your financial benefit.
The Tangible Benefits of Homeownership
Owning a home can be a very rewarding experience. In addition to giving you a sense of pride and a connection to your community, homeownership provides tangible benefits that can improve your financial well-being. Two key benefits are equity and tax advantages.
Building Equity Over Time
As you make mortgage payments, you build equity in your home. Equity is the difference between the market value of your home and the amount you owe on your mortgage. Once you've accumulated enough home equity, you can tap into it for various needs like home renovations, debt consolidation or other expenses. You can typically obtain this cash through a second mortgage, such as a fixed-rate Home Equity Loan or a Home Equity Line of Credit (HELOC).
As a homeowner, you can deduct some of the interest you pay on your mortgage from your federal income taxes. This can save you a significant amount of money each year.*
Strategies to Unlock Your Home’s Financial Potential
Understanding the different ways you can take advantage of your home can help you unlock its full financial potential and move you closer to your goals.
1. Home Equity Loans
Having home equity can be a safeguard for managing large expenses. For example, if you need access to funds for home improvements, debt consolidation, school tuition, an emergency or any other significant expense, consider a Home Equity Loan.
A home equity loan allows you to borrow against your home’s equity and receive a one-time cash payment. Since this type of loan is a second mortgage, your primary mortgage, including your interest rate, remains unaffected. This can be a great advantage if you have a very low interest rate on your first mortgage and you want to access cash from your home equity without refinancing your entire loan balance — especially if rates are running on the higher end in the current market. You’ll also have the security of a fixed interest rate and payment on this type of loan, unlike a line of credit. The amount borrowed may even be tax deductible if the funds are used to renovate your home.*
2. Consolidate Debt
Your home equity can help you take charge of your debt. If you have a lot of high-interest debt from credit cards or personal loans, consider consolidating your debt with a home equity loan or cash-out refinance. A cash-out refinance replaces an existing mortgage with a new loan with a higher balance, sometimes with more favorable terms than the current loan. The difference between these two loans is distributed to the homeowner as cash.
Credit card and personal loan interest rates are typically much higher than home loan interest rates, so a cash-out refinance or home equity loan could potentially save you a lot of money on interest payments.
Paying down debt can also boost your credit score. But don’t treat a cash-out refinance or home equity loan like an ATM. Have a plan in place to avoid further debt.
3. Home Improvements
Certain improvements to your property can substantially enhance your home’s worth. Upgrading areas like the kitchen and bathrooms or incorporating energy-efficient elements can greatly appeal to future potential buyers if you choose to put the house on the market. Even if you’re not planning on selling anytime soon, this kind of investment often yields long-term financial benefits. Any increase in market value also contributes to an increase in your home equity.
4. Exterior Improvements
Exterior improvements like landscaping, a new wood deck or a wrap-around porch not only boost curb appeal but may also boost your home’s market value. When your market value increases, so does your home equity. Plus, when you’re ready to sell, potential homebuyers may be willing to pay more, often making these types of upgrades good long-term investments.
If you have good credit, liquid 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. A vacation home can provide a reliable getaway that appreciates over time — and you can buy one with as little as 10% down.
6. Higher Education
As the equity in your home grows, so does the amount of accessible funds you have available to pay for a child’s education or your own tuition expenses. Just be sure to compare the interest rates of a home equity option vs. taking out a student loan. And do the math to ensure your existing budget can manage the increased or additional loan payments you’ll be responsible for.
7. Renting Out Spare Rooms or Basement
If you have extra space, you may be able to generate additional income by renting out a spare bedroom, guest house, casita or basement. A bedroom, guest house or casita could be rented to a tenant, and a spacious basement or garage could be leased to someone who needs storage space. Do your due diligence before renting out a room to ensure you understand the laws involved, any HOA restrictions, insurance, permits and safety requirements and tax implications.
8. Listing Your Space for Short-Term Rentals
Earn money by listing your guest house, casita or extra room as a short-term rental on a peer-to-peer exchange service such as Airbnb. Hosting out-of-town visitors can be very profitable, especially if you live in a tourist spot, business or transportation hub or near a university. Again, you’ll need to comply with your area’s legal, zoning, insurance, tax rules and other regulations.
9. Rent Out Your Pool or Backyard
Have a pool or backyard that often goes unused? Rent it out and bring in some extra cash. Apps like Swimply and Peerspace allow you to list your pool or yard and connect with individuals looking to swim, host a party, conduct photoshoots and even film commercials. That said, before you get started on using your property for this type of business venture, be sure to check with your homeowners insurance provider on any additional protections needed.
10. Home Equity Line of Credit (HELOC)
A HELOC allows you to access your home equity by providing a line of credit, which behaves similarly to a credit card. Borrow the amount you need when you need it, up to your approved limit. Keep in mind that HELOCs use variable rates, so the interest rate will fluctuate based on certain benchmark rates and the current market.
*Consult a tax adviser for further information regarding the deductibility of mortgage interest and charges.
Meet Our Contributing Editors
Bradley Thompson and Afton Lambert are Contributing Editors for Pennymac’s consumer content and are exemplary leaders within the mortgage industry space. Both experts take pride in helping our customers achieve and sustain their aspirations of home.
For over 13 years, Bradley has achieved success as a high performer in various leadership roles including consumer direct sales and mortgage fulfillment positions.
With over 10 years of mortgage experience, Afton started her career as a top performing Loan Officer, before transitioning into her leadership role, where she has recruited, hired and trained Loan Officers.