How to Use Home Equity to Build Wealth

Your home can be a powerful tool for building wealth. By tapping into your home equity—the portion of your home’s value you own outright—you can access affordable financing to grow your net worth. 

Whether you want to invest in real estate, fund home improvements, or start a business, leveraging home equity can help you achieve your financial goals. In this guide, we’ll show you how to use your home equity strategically to build wealth and secure your financial future.

Is home equity an asset?

Yes, most financial experts consider home equity an asset. An asset is something that increases your net worth, such as your investments, bank account deposits, and vehicles. 

The definition can get muddled if, like many Americans, you’re still paying off a mortgage on your home. In that case, your lender has a claim to the value of your home in the amount of your mortgage balance, and this fraction is not considered in your home equity. 

For example, if your home is worth $200,000 and you still owe $150,000 on your mortgage, you have $50,000 in home equity, or 25%: 

$200,000 – $150,000 = $50,000

$50,000 / $200,000 = 25%

How do you use a home equity loan or HELOC to make money?

Home equity is considered an asset because you can translate it into cash, either by selling your home or by borrowing against it. When you borrow against your home, you’re using it as collateral to secure your debt, just like your mortgage or even an auto loan.

Secured loans tend to come with lower interest rates that make repaying your debt more affordable—but if you don’t repay the debt, your lender can repossess your collateral. This is what happens when lenders foreclose on a home to ensure they’re repaid. Therefore, using home equity poses more risk than a personal loan or traditional line of credit from a bank.

Home equity loans and home equity lines of credit (HELOCs) are two of the most popular options for borrowing against your home equity because they leave your primary mortgage in place (as opposed to a cash-out refinance loan, for example). 

Home equity loans and HELOCs also allow you to use the funds for whatever you want, unlike student loans or auto loans, which must be used for a stated purpose. That flexibility makes these ideal candidates for potential moneymaking ventures. 

How to make money from your home equity: 5 ways

You can use many types of debts to grow your wealth further, but home equity financing is well-suited to this task. Here are several of the best ways to do it:

1. Pay down high-interest debt
2. Start a business
3. Upgrade your home
4. Grow your career skill set by investing in your continued education/professional licensing
5. Invest in another property

1. Use home equity to pay down high-interest debt

You may not think of debt consolidation as a wealth-building endeavor because most borrowers are more concerned with getting a lower interest rate or monthly payment amount. 

However, using the lower interest rates home equity loans and HELOCs offer to pay down your debt faster and with less money wasted on interest payments will help you on your wealth-building journey. 

Your net worth is calculated by comparing your assets to your liabilities; by focusing on this half of the equation, you can boost your bottom line by eliminating your debt liabilities even faster.

The top use of home equity to build wealth is to consolidate high-interest debt. After that, it depends on what is important to you and where you are in life. When facing these types of decisions, the borrower/homeowner usually benefits from a financial professional who can help prioritize and identify what is most important.

Erin Kinkade, CFP®

2. Use home equity to start a business

Starting a business is many people’s dream, but it can be expensive. Most lenders also require at least two years in business before you can apply for small business loans, making it challenging for business owners to even secure enough resources to launch. As a result, many rely on personal funds. 

A HELOC, in particular, can help you in the early days of running a business. It can be tough to know your business’s specific funding needs when you’re just starting, and having access to a flexible line of credit can offer a welcome safety net.  

3. Use home equity to upgrade your home

Taking out a HELOC or home equity loan to improve your home can be a terrific way to build wealth—and it’s an excellent option to upgrade your living situation. 

The right improvements can boost your home’s value (and your net worth)—and you might be able to deduct the interest you pay on these debts if you use the funds to “substantially improve your home that secures the loan” and meet other conditions.

4. Use home equity to grow your career skill set

Going back to school to learn a new career or boost your skills within your current career is an investment in yourself, and you can use home equity financing to help pay for these costs. 

It’s best to use federal student loans for formal college if you can, but sometimes, these funding sources don’t apply. Attending a coding bootcamp, for example, can unlock new high-income possibilities, but certain programs may not be eligible for traditional student loans. 

5. Use home equity to invest in another property

You can also use home equity financing as a down payment on another real estate purchase or even buy another home outright. This can act as your entry into income-producing ventures such as rental properties, fix-and-flip home remodeling, or short-term vacation rentals. 

All of these uses provide great opportunities to build wealth. The best way to do this will depend on your goals, financial condition, risk tolerance, and earning potential—whether you invest in additional education/professional licensure or start your own business. 

Erin Kinkade, CFP®

What are the risks of leveraging debt to build wealth?

While home equity loans and HELOCs offer the potential for significant rewards, consider the risks too—most notably, you risk foreclosure. If your wealth-building idea fails and you can’t keep up with payments, you could lose your home.

This is true for anyone taking out a home equity loan or HELOC, but it’s critical to consider if you’ll be using the funds for something that isn’t guaranteed, such as a new business venture. Only a third of businesses that started in 2013 were still open by 2023, for example.

Home equity financing can take two to four weeks, and you’ll often pay closing costs and fees, though rates are generally lower. You might undergo an underwriting process for a home equity loan similar to that of a mortgage, for example, and pay up to 5% in closing costs. 

If you sell your home before you repay the debt, you’ll need to pay it off with the proceeds from your home sale and your mortgage. This reduces the amount you get from the sale and can make it harder to buy your next home. If home values drop, you may even owe more than you can sell your home for.

Should you leverage your home equity to build wealth?

Like many financial decisions, there’s no clear “yes” or “no” answer when it comes to whether and how to use home equity to build wealth. 

Here are six questions to help with the decision:

1. What’s your backup plan? If your wealth-building venture doesn’t pan out, how will you make the payments on your debt? Are you willing to accept the risk of foreclosure?
2. What are your other options? Make a list of all potential funding options and compare your costs in terms of fees and total interest paid. Loan calculators are helpful for this.
3. Do you have enough home equity? Many lenders will offer up to 80% of your home’s value in funding minus your mortgage debt. It can take time to pay down a new mortgage enough to qualify for home equity financing.
4. How flexible is your monthly budget? If you’ll be using a variable-rate HELOC, make sure your monthly budget can handle the swings in payment amounts from shifting interest rates and when you switch from the draw phase to the repayment phase. 
5. Will you be making home improvements? You might qualify for a tax break for home improvements that boost your home’s value and increase your net worth, but ensure you qualify before basing your decision solely on this factor. 
6. Do you plan to sell your home before the debt is repaid? If so, you’ll get less from your home sale. You’ll also be more vulnerable to fluctuating real estate prices.