5 Creative Ways to Use Your Home Equity
These non-traditional uses for a home equity credit line can help with creating additional income streams.
The most popular reasons for using a home equity credit line are debt consolidation, a home remodel and a second mortgage refinance. But have you considered these five other reasons for tapping the equity in your home with a home equity credit line?
Home Equity Credit Line Creative Use #1: Rental property purchase
Most people can take advantage of a home equity loan because the value of their home has increased, often significantly. The more property you own, the more you can take advantage of the general rule that, over time, real estate values and rent income go up. A draw on a home equity credit line can provide some or all the funds you need to buy a rental property.
Make sure you do the math to make sure your rental income will cover your expenses and factor in the impact of vacancies and repairs. Don’t borrow money for this if you don’t have a way to cover your payments.
Home Equity Credit Line Creative Use #2: House flipping
The popularity of house flipping shows makes it look like anyone can do it. That’s not true. It’s best if you know the construction industry and even better if you have some skills in this area.
You also have to be business-minded and only buy properties you can turn for a good profit. If you pay too much, you could even lose money after the repair and remodel. That said, a home equity credit line could provide the funds needed to quickly grab up a property that you can transform for a nice profit.
One caveat that bears mentioning with regard to these first two uses: Your lender will typically require you to use your primary residence — not the rental property or the flip house — as collateral on your HECL.
Home Equity Credit Line Creative Use #3: Rideshare vehicle purchase
Driving for Lyft or Uber could be a source of extra income, but not all vehicles are eligible. You could use your home equity credit line to buy a car that riders prefer and start making money right away.
Because cars go down in value every month, you will be more profitable if you buy an older, reliable and appealing car. Remember to pay down your credit line with your driving income. The last thing you want is to end up with a loan balance higher than the value of your car.
Home Equity Credit Line Creative Use #4: Business start-up
Do you have a great idea for a business? If you find yourself doing a profitable side gig but need capital to expand, you may be your best source of borrowing.
Be realistic and recognize that many startups don’t make it off the ground, so any funds you borrow from your home equity credit line may have to be repaid from other income sources. And keep in mind that your lender may only allow you to use the HECL funds to support a business that is not your primary source of income.
That said, if you have a strong business plan, your home equity credit line could turn dreams into a reality.
Home Equity Credit Line Creative Use #5: Certificate programs
Most student loan program require you to be pursuing a degree and can’t be used for certification programs. Sometimes, you just need a certificate to get a nice boost to your income.
A home equity credit line can get you the funds needed to pay tuition. You have to be pretty certain that you are going to complete the program, otherwise you will have increased debt without the increased income to pay it back.
Did you notice the one thing that all of these uncommon home equity credit line uses have in common?
They all should create additional income that can be used to repay the debt. In general, you should avoid borrowing from your home equity credit line if it will not either increase the value of your home or increase your income. This is because an important goal of home ownership is to have the mortgage paid in full by retirement. Almost everyone makes less after they retire so not having a mortgage makes it easier to pay the bills.
Someone who uses their home equity credit line for lifestyle spending is going to find that, come retirement, they will have less income but still have home debt.
As with any major financial decision, it’s a good idea to consult a tax professional in advance about any possible ramifications. Then use our home equity credit line calculator to help determine the amount you could qualify for or visit a Zions Bank branch near you to learn more about whether a home equity credit line is right for you.
Don Milne is Financial Literacy manager for Zions Bank.
Loans are subject to credit approval. Terms and conditions apply. See a banker for details. Equal Housing Lender. NMLS #467014.