What Is Home Equity?

Blog posted On February 29, 2024

Being a homeowner comes with a number of perks and financial benefits; one of which is home equity. Homeowners looking to maximize the value of their investment would be wise to understand their home equity, how it works, and what they can use it for. In this blog post, we'll answer all your burning questions about home equity, and hopefully you’ll leave with a few ideas on making the most out of your investment.

What Is Home Equity?

Home equity is the portion of your property that you truly own. It's the difference between the market value of your home and the outstanding balance on your mortgage. Essentially, it's the value of your home that you've paid for, either through your down payment or through monthly mortgage payments.

How Does Home Equity Work?

As you pay down your mortgage or as the value of your home increases, your home equity grows. You begin acquiring home equity as soon as you make that down payment. It's a valuable asset that can increase over time, providing you with financial flexibility and opportunities for future financial endeavors.

How To Calculate Your Home Equity

Calculating your home equity is relatively straightforward. You simply subtract the amount you owe on your mortgage from the current market value of your home. For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, your home equity would be $100,000.

How To Build Your Home Equity

Building home equity is a long-term process that requires consistency and strategic financial planning. Here are some effective ways to increase your home equity:

?      Increase your down payment: Putting down a larger down payment when purchasing your home instantly increases your home equity while also decreasing the amount of your monthly payments.

?      Pay your mortgage consistently each month: Making on-time mortgage payments every month reduces your outstanding loan balance, which increases your home equity.

?      Pay more than the minimum: Paying more than the minimum required mortgage payment helps to reduce the principal amount faster, accelerating the growth of your home equity.

?      Stay in your home for 5+ years: The longer you stay in your home, the more equity you'll build as you continue to pay down your mortgage and potentially see an increase in property value.

?      Renovate or add curb appeal: Improving your home's condition and appearance can increase its market value and, in turn, boost your home equity.

Ways You Can Use Home Equity

Once you've built up home equity, you can leverage it for various financial purposes. Here are some common ways to use home equity:

?      Purchase a new home: You can use your home equity as a down payment on a new home, allowing you to upgrade or downsize as needed.

?      Use it for retirement: Home equity can serve as a valuable source of income during retirement, either through downsizing to a smaller home or utilizing a reverse mortgage.

?      Make home renovations: Using home equity to fund renovations or improvements can increase the value of your property even further.

?      Consolidate high-interest debts: You can use a home equity loan or line of credit to consolidate high-interest debts, such as credit card debt, into a single, more manageable payment with a lower interest rate.

How To Access Your Home Equity

There are several ways to access your home equity, and which one you choose can depend on what you’re looking to get out of it. Here are a few options:

?      Cash-Out Refinance: This involves refinancing your mortgage for a higher amount than you currently owe and pocketing the difference in cash.

?      Home Equity Line of Credit (HELOC): A HELOC allows you to borrow against the equity in your home as needed, similar to a credit card, with a variable interest rate. If there is an existing first lien mortgage, this stays in place, and the HELOC typically takes second lien position.

?      Reverse Mortgage*: Available to homeowners aged 62 and older with considerable home equity, a reverse mortgage allows you to borrow against your home equity while still living in your home, with no monthly mortgage payments required (borrower still responsible for taxes and insurance).

?      Home Equity Loan: Also known as a second mortgage, a home equity loan provides a lump sum of money upfront, which you repay over time with a fixed interest rate.

?   All In One Loan™: A unique mortgage product that combines home financing & personal banking into one dynamic tool. Access equity 24/7. Pay down principal before interest. Potentially pay off your home 2x-4x faster & save tens of thousands on interest expenses.  

To Conclude

Home equity is a valuable asset that can provide homeowners with greater financial flexibility. By understanding how home equity works, how to build it, and how to leverage it effectively, homeowners can make informed decisions that benefit their financial well-being in the long run. Whether it's funding home improvements, consolidating debts, or planning for retirement, home equity can be a powerful tool for achieving your financial goals.

*This blog is not from HUD or the FHA and was not approved by HUD or any government agency

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Source: Investopedia