After your home equity loan is approved, you’ll find yourself with a significant amount of cash on hand. However, letting that money sit idle means missing out on potential interest earnings. So, it’s essential to know how to maximize the earnings on your home equity loan until you’re ready to use it.
The lump sum you receive at closing for a home equity loan can be quite substantial. Whether you plan to spend it all at once or gradually draw from it as needed, your timeline for using the funds will determine the best opportunities for maximizing interest earnings.
One common use for home equity cash is for home improvements, renovations, or additions. The complexity of your plans will dictate how long the construction process will take. Factors such as ordering materials, obtaining permits, and potential zoning changes can all impact the timeline.
For example, a bedroom or living room update may take one to two weeks, while a major home addition could take six months or more. Understanding the duration of your project will help you decide how to invest your funds wisely.
If you’re using your home equity to pay off high-interest debt, you may not have the cash on hand for long. However, if you have other uses for the funds that may take longer, it’s essential to choose the right account options to hold your money.
For short-term liquidity of up to six months, a savings account may be a suitable choice as it allows you to accrue some interest while maintaining easy access to your funds. However, be aware of any withdrawal limits that your financial institution may impose.
If you plan to hold onto the money for up to a year, consider a high-yield savings account or a money market account. These accounts offer higher interest rates than traditional savings accounts and can help your balance grow faster.
For a timeline of exactly one year, a 12-month certificate of deposit (CD) may be a good option. CDs lock in a guaranteed interest rate for the term, but be aware that withdrawing funds early may result in a penalty.
If your timeline extends to one to three years, you could structure a CD ladder to optimize earnings while maintaining liquidity. This strategy involves timing CDs to mature as cash needs arise, allowing you to earn interest while still accessing your funds when needed.
For timelines of three years or longer, CD ladders and Treasury bills can be solid options. Avoid speculative investments like stocks, as they carry more risk and could potentially erase your savings in a market downturn.
By carefully considering your timeline and investment options, you can maximize the earnings on your home equity loan money until you’re ready to use it. Planning ahead and choosing the right accounts can help you make the most of your funds while achieving your financial goals.
