Where to keep your home equity loan money until you need it

Once your home equity loan is approved, you’ll be sitting on a pile of cash. And depending on your plans, those funds may be in standby mode for several weeks or months.

However, letting your cash sit idly could mean missing out on interest earnings in the meantime. So, here’s how to maximize the earnings on your home equity loan money until you’re ready to spend it.

The lump sum you’re given at closing on a home equity loan is likely to be quite sizable. You may intend to spend the whole amount immediately or draw portions of the cash as a project unfolds.

Your time horizon for putting those funds to use — whether it’s days, weeks, or months — will dictate which opportunities are best for maximizing interest earnings.

How long do home improvements and renovations take?

One of the most common uses for home equity cash is home improvements, renovations, or additions. The more complex the plans, the longer the construction is likely to take. There will be materials to order, delivery dates, permits to obtain, and possible zoning change requests.

Here are some sample project timelines from John Merrill Homes, a custom homebuilder in Jacksonville, Florida:

• Bedroom or living room update: one to two weeks

• Outdoor area improvement: two to six weeks

• Kitchen or bathroom upgrade: four to eight weeks

• Adding a new room: three to six months

• Complete kitchen or bathroom upgrade: six to 12 weeks

• Minor home addition: four to eight months

• Major home addition: six to 12 months or more

• Whole house remodel: 12 to 18 months or more

If you’re using your home equity to pay off high-interest debt, you probably won’t have the cash in your hands for long. However, other uses may have a longer shelf life for the equity you’ve cashed out.

Here’s a closer look at the best account options for holding home equity loan funds, depending on when you plan to use them.

If you’ll be using your home equity money right away, depositing it in your checking account will suffice. The money won’t be around long enough to earn any interest, and checking accounts are famous for offering little, if any, interest.

For short-term liquidity of up to six months, a savings account may be the better choice since you’ll have time to accrue some interest. Plus, transferring money from savings to checking is often immediate when both accounts are held at the same financial institution.

That said, if you’re shopping for savings account rates and find a better return somewhere other than where you currently bank, that can work too. However, transfers may take two to three days, so you’ll need to keep that in mind.

Additionally, regulations that previously restricted the frequency of withdrawals from savings accounts have been lifted, but financial institutions may still impose limits on the number and amount of withdrawals:

• Daily ATM withdrawal limits may range from $300 to $5,000.

• Your financial institution may limit withdrawals from a savings account to six per month.

• Limits on debit card withdrawals will vary from one provider to the next.

• In-person withdrawals made at a bank location may offer the most access to cash, but there are still limits that vary by financial institution.

Knowing how much and how often you’ll need cash can help you decide which kind of account to use.

Holding the money for up to a year is suitable for a high-yield savings account or money market account. These accounts still offer liquidity and security, but pay far above the national average rates. In fact, it’s possible to find accounts that earn up to 4% APY, helping your balance grow faster over the course of a year.

If your timeline is exactly one year, you could also consider depositing your funds into a 12-month certificate of deposit (CD). CDs allow you to lock in a guaranteed interest rate for the entire term, which is especially beneficial if rates are expected to fall.

However, if you withdraw your money before the CD matures, you’ll be subject to a penalty. So, it’s important to choose a CD only when you’re certain you won’t need to access the funds early.

Working with a time horizon of one to three years would allow you to structure a CD ladder. If the money is being spent in portions, you can time the CDs to mature as the cash needs arrive.

For example, say you have $40,000 to spend over the course of one year. You could build a ladder of CDs that mature every three months, allowing you to optimize earnings while maintaining some liquidity.

In this example, you’d earn nearly $900 over one year. Of course, you can adjust the ladder to align with your total time frame and have the ladder steps mature as cash is needed.

3 years and longer

In this case, CD ladders and Treasury bills can be good options. You won’t want to make any speculative investments, such as buying stocks, because you might be taking too much risk. A stock market downturn could erase your savings.