5 smart ways to use your home equity this August

For the last few years, homeowners have had a good borrowing option at their fingertips: their home equity. Not only have home equity levels increased dramatically since 2020 — leaving the average homeowner with nearly $300,000 in equity — but interest rates on home equity loans and home equity lines of credit (HELOCs) have been more attractive than the alternatives. 

That's a large part of why we've seen regular upticks in home equity loan originations over the last year or two. After all, why would a homeowner with hundreds of thousands of dollars in home equity opt to borrow money with a high-rate credit card over a lower-rate home equity loan or HELOC? Doing so wouldn't make much fiscal sense, at least in most cases. 

But while borrowing against your home's equity can be beneficial in today's economic environment, it's important to remember that your home is used as collateral for this type of borrowing. So, you'll need to use this resource wisely. Below, we broke down a few ways you can do that this August.

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5 smart ways to use your home equity this August

If you want to leverage your home equity strategically, here are a few uses to consider right now:  

Fund home improvements and repairs

With pleasant weather still lingering, August is an ideal time to tackle home improvement projects. That could include upgrading your kitchen appliances and countertops, refreshing your bathroom fixtures and finishes, adding energy-efficient windows or insulation or replacing or repairing your roof. 

And if you're going to make those repairs or renovations, it makes sense to use your home's equity to finance them. After all, using your home's equity to finance these improvements can offer several advantages, including:

• Tax benefits: Unlike personal loans or credit cards, the interest on home equity loans and HELOCs used for home improvements may be tax-deductible. This can lead to significant savings come tax season, effectively lowering the cost of your renovations.
• Lower interest rates: Home equity products typically offer much lower interest rates than credit cards or personal loans, making them a cost-effective way to fund larger projects.
• Increased home value: Strategic improvements can boost your home's market value, potentially increasing your equity further. This creates a positive cycle where you're reinvesting in your most valuable asset.

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Consolidate high-interest debt

If you're carrying balances on high-interest credit cards or personal loans, using home equity to consolidate that debt can potentially save you thousands in interest. For example, the average credit card rate is currently hovering near 24%, but the average home equity loan rate is just 8.59% and the average HELOC rate is 9.17%. By consolidating your high-rate credit card debt in this manner, it could result in serious savings over time.

Fund education expenses

With the school year starting soon, August is a prime time to consider using your home equity to cover any necessary education costs that arise. Whether you're heading back to school yourself or have children starting college, a home equity loan can provide the funds you need at a lower interest rate compared to many student loans. If you go this route, though, compare the terms carefully to your student loan options. In some cases, well-qualified borrowers may find that private student loans offer better rates than the alternatives.

Invest in a vacation or investment property

In certain cases, using your home's equity to purchase a secondary property can be a smart move, as it can potentially provide rental income and allow you to capitalize on long-term appreciation. Both can be big payoffs for the right buyer, and purchasing the right rental property could be an especially smart move in today's tight housing market. Just be sure to factor in all costs that could arise, including property management, maintenance and potential rental income fluctuations.

Start a business or expand an existing one

If you've been considering entrepreneurship, August can be a good time to lay the groundwork. And your home equity can provide the capital needed to start a new business or expand an existing one, so you may want to consider tapping into it for this purpose.

Before you do so, though, be sure to carefully evaluate your business plan and projected cash flows. After all, while your home's equity can be a lower-cost funding option than other business loans, you're still using your home as collateral, so it's important to do your due diligence first.

The bottom line

There are many great ways to use your home's equity this August and the options above are just a start. One of the main benefits of borrowing from your home's equity is that you can use the funds for nearly any purpose, so find one that makes sense for you and pursue it. By thoughtfully leveraging your home equity, you can potentially save money, invest in your future and achieve any number of important financial goals. Just be sure to proceed with caution and have a solid plan for repayment to ensure you're making the best moves possible for your money.