Do you have idle equity sitting in your home that could be building wealth instead? One of the greatest aspects of home ownership is that you can increase your wealth every month by building equity in your home and reducing your tax bill at the same time.
After you’ve been in your home a few years, you may have some equity that you could put to work for you. Even if the property has appreciated by just a few percentage points per year, significant equity can build up fairly quickly.
The first way most homeowners think of using their equity is to pay off high-interest debt. That’s one popular option, but you could also invest that equity in other ways. Here are 6 more ways to put your equity to work for you.
1. Trade Up
Using your equity as a down payment for a larger home could make financial sense. Using additional equity to trade up will allow you to put a significant amount of money down on your next home. That could allow you to own a home you never could afford before.
Another way to use your equity is to scale down. With the recent changes in tax laws, homeowners may sell a home every two years and walk away with tax-free profits of up to $250,000 (for singles) and $500,000 (for married couples). By scaling down, you can purchase a smaller, less expensive primary dwelling, and use the extra cash for investments, debt reduction or even purchasing an investment property.
3. Second Home
If you know you’re retiring to a particular area in the next few years, study that market now. You may want to buy the home now while prices are still affordable. If you do, you could rent the home during the peak vacation season. Many second homeowners discover they can just about cover their annual property expenses by renting out during peak season.
4. Investment Property
While the stock market often bounces up and down, many investors feel comfortable with the security of real estate. Not everyone has extra money to play the stock market profitably, but landlords can enjoy income every month. The secret is selecting the right property and finding expert property management if you don’t want to manage the property yourself. We can help with both these issues.
5. Shared Equity
Another way to put your idle equity to work is to lend it to an adult child as a down payment for his or her first home. Some parents maintain a co-ownership interest while the young adult makes the mortgage payments. At the time of the sale, the equity is then split between the two. This is called a shared-equity arrangement.
If you really like where you’re living, but desire a few extra amenities, consider taking cash out for remodeling or adding to your current home. The interest paid on some home equity loans is tax deductible, just as it is with your first trust.