How to use home equity to build long-term wealth

You’ve built real value in your home, and that value could help you reach the goals you care about most. For example, you could learn how to use home equity to build wealth through strategic investments or improvements to the property that substantially increases value.

A home equity loan or home equity line of credit (HELOC) could support those goals when you borrow thoughtfully and have a clear plan for using the funds. The right strategy depends on your financial goals, your timeline, and how much risk you're comfortable taking. 

This guide explains several wealth-building strategies, how a home equity investment works, the pros and cons of each approach, and the tax considerations to understand before you borrow.

Ways to use home equity to build wealth

A home equity loan or HELOC could enable you to borrow against your home's equity, using your property as collateral. Home equity is the difference between your home's market value and what you owe against it. If you have a primary mortgage, a home equity loan or HELOC is a second mortgage on your home.

Home equity loans and HELOCs are tools you could use to reach financial goals that could increase your net worth over time. You repay them, with interest, alongside your primary monthly mortgage payment. The following strategies show some of the most common ways homeowners use home equity to build wealth. 

Our guide to using a HELOC for a major purchase explains how the financing works and what to consider before borrowing for a large expense.

Fund renovations that add resale value

Home renovations are a common use for home equity loans and HELOCs. Using either one to fund home improvement projects that raise your home's value could help you build more equity, and more wealth, over time. For example, projects such as kitchen and bathroom remodels or adding livable square footage often have the potential to boost value. 

You could also get the benefit of a tax deduction for interest paid when using home equity for improvement projects. Talk to a tax professional about when you can deduct interest on home equity loans or HELOCs. 

Buying an investment or rental property

You might use the equity in your primary home to help cover the down payment on a rental or investment property. You could then build wealth from rental income, property appreciation, or both over time. This strategy comes with meaningful risk. Your home secures the loan, and rental income and property values aren't guaranteed.

Consolidating high-interest debt to free up cash flow

A lower-rate home equity loan or HELOC could reduce your monthly interest costs when you use it to consolidate high-interest debt. That may save you money on interest and could help you pay off the debt faster. Before you borrow, our guide to how much you can borrow can help you estimate your options.

What is a home equity investment (HEI)?

Also called a home equity sharing agreement, a home equity investment is a contract in which an investment company gives you a lump sum now in exchange for a share of your home's future value. You make no monthly payments, but you must buy out the investor's share when the agreement ends, often in 10 to 30 years, or when you sell.

You might also find this searched as home equity investment loans,  but an HEI isn't a loan. When the agreement ends, you pay back the original lump sum you received, plus an agreed-upon percentage of your home's market value at the time. If the home grew in value during the term, you could owe much more than you anticipated.

Approval for an HEI hinges primarily on your equity value and the home's location, rather than your credit scores. That distinction affects how it works and how it's regulated. 

Home equity investment pros and cons

Home equity investment pros and cons can influence your decision to choose this option for using equity to build wealth. For instance, there are no monthly payments, which may appeal to homeowners who prefer to keep their budget the same. Less stringent credit requirements can make an HEI easier to qualify for versus a traditional HELOC or home equity loan.

There are important trade-offs to consider, however. The amount you owe when the agreement ends could be much larger than the lump sum you received upfront. There may also be upfront fees, which often range from about 3% to 5%, and the total cost is difficult to predict because it depends on your home's future value. 

Depending on the terms of the agreement, you may still owe the agreed-upon amount even if your home's value declines. You may build less wealth than anticipated over the long term with an HEI. Additionally, many HEIs require a lien on the property. This could make it more difficult to borrow against your home or to sell it without first repaying the HEI.

Whether a home equity investment is a good idea depends on your financial goals, your timeline, and your comfort with the trade-offs. Before you decide, compare an HEI with a home equity loan or HELOC, and consider talking with a qualified financial advisor.

Home equity loan vs. HELOC vs. home equity investment

The comparison below highlights some of the key differences between a home equity loan, a HELOC, and an HEI.

Tax considerations when using home equity to invest

If you're thinking about how to use home equity to build wealth through investing, make sure to consider potential tax implications. Some uses of home equity funds could qualify for tax breaks, but not all uses are eligible.

Interest on a home equity loan or HELOC is generally deductible if you use the borrowed funds to buy, build, or substantially improve the home that secures the loan. Using the funds for investments, such as buying a rental property or investing in stocks or other securities, generally doesn't qualify for the home mortgage interest deduction.

In some situations, you may qualify for a separate investment interest expense deduction, but the rules are complex and don't apply to every investment. Because tax situations vary, talk with a qualified tax professional about your specific circumstances.