How to Use Home Equity to Build Wealth: 5 Ideas

Whether they talk about them or not, everybody has big goals and dreams.

And as a homeowner, you’ve already accomplished one of them, so take a second to pat yourself on the back! At Hometap, we’ve helped thousands of homeowners access their home equity so they can achieve a wide variety of financial goals. One of those goals is to build wealth, which can set you up for long-term success and stability. We don’t tell you how to use your Investment funds — that’s totally up to you — but we’re passionate about empowering you to prioritize your financial health, so we wanted to share some ideas for investing home equity to grow your money and achieve even more.

1. Invest in Real Estate

Your equity can help you cover a down payment on another house — and whether it’s a second home or an investment property, you can create cash flow in the near term through rental income and grow your net worth through home appreciation over time. Win win.

As you’re making decisions about selling or refinancing investment properties, it can be helpful to use the return-on-equity calculation to guide your plans. In short, this calculation can help you evaluate how effectively your equity in any given property in your portfolio is generating profit.

Here are some of our favorite resources for learning more about real estate investing:

• The Beginner’s Guide tor BRRRR Real Estate Investing (Hometap)
• How to Invest in Real Estate: 5 Simple Strategies (NerdWallet)
• 5 Simple Ways to Invest in Real Estate (Investopedia)

Home equity can also be used to maintain and upgrade investment properties. That’s exactly what Florida investor Luis set out to do. Read more about his story.

2. Diversify Your Investment Portfolio

Many homeowners use their equity to create a more well-rounded portfolio that includes stocks, bonds, and real estate.

Investing your money has proven to be an easier and faster way to build wealth than keeping it as untouched equity or savings: since the S&P was introduced in 1957, its annual return has averaged over 10% through the end of last year. Compare that to the average home price appreciation of 4.27%, and you’ll quickly understand why some homeowners choose to tap into it to put it into the market.

Where do you start? Here are some resources that can help you get going:

• A Beginner’s Guide to Diversifying Your Portfolio (Hometap)
• Investing 101: Beginner Stock Market Investing Masterclass (Udemy)
• Investing: An Introduction (Investopedia)
• Investing Basics YouTube Playlist (Charles Schwab)
• Investing 101: Ramp up your investing (Fidelity)
• Beginner Stock Market Investing Class (Udemy)
• Femme Financial Coaching (Instagram content creator)
• Basic Financial Literacy (Instagram content creator)
• Market Mondays (Wealth management podcast)

Learn how Hometap homeowner Clay used his home equity to capitalize on market opportunities.

3. Start or Expand Your Business

Is it time to take your side hustle to the next level? Your home equity can help you jumpstart a new business — or even expand your existing one. And for many current and aspiring business owners, it can be a preferable solution to taking out a business or personal loan. Since home finance products are secured by the home, they have lower interest rates than an unsecured loan (one without collateral). With a home equity investment, for example, there aren’t any monthly payments that restrict your cash flow, nor any income requirements to qualify.

Check out these resources to learn more about using your equity to fund and grow your business:

• Pros and Cons of Using Home Equity to Fund Your Business
• Using Your Home Equity to Start a Business
• Scaling Your Side Hustle: From Passion to Profession

Of course, it’s important to consider the risks that come along with tapping into your equity to fund your business: if your business doesn’t take off or goes under, you could potentially lose your home.

When business owner Michael received an opportunity to expand his business, he made it happen with the funds he received from his home equity investment. Read more about his story.

4. Pursuing Higher Education and Skill Development

Putting your equity toward education and tuition costs can boost your wealth in the long run by investing in the development of valuable and transferable skills that can translate to higher positions and earnings in the workplace.

Of course, it makes sense to do your homework on current student loan interest rates versus the cost of accessing your equity — and on your expected/desired salary and the cost of education — to see how much funding you might need, and what option makes the most sense for you.

Learn how Hometap homeowner Jenny used her Investment to put money toward her children’s education.

5. Consolidating Debt

If you’re surprised to see this as a way to build wealth, hear me out. Consolidating debt is a strategy aimed at eliminating high interest faster so that you can focus on wealth building. It involves small, achievable steps to deal with it and get rid of it faster. It’s common for homeowners to consolidate their debt before they begin building their wealth in order to reduce the cost of interest and shorten their payoff timeline.

If you focus first on consolidating high-interest debt — like revolving credit balances — not only can you improve your debt-to-income ratio and reduce your interest costs, but you can reallocate this money into savings or other avenues that will reap increased returns.

Read about how Hometap homeowner Steven used his Investment funds to consolidate debt and even had money left over to put a down payment on a new home.

Whether you decide to put your home equity toward building wealth or not, remember that as you continue to maintain your home and make thoughtful repairs and updates, you’ll continue boosting your equity and growing your largest asset…and that’s something to be proud of.