Understanding Home Equity
Equity. The word alone sounds promising, doesn’t it? It should. Equity equals value, and it’s a great strategy for building wealth.
But before you can put that equity to good use, you should first understand what home equity is.
What Is Home Equity?
Equity is calculated by taking the market value of your home and subtracting what you still owe on it (aka the balance of your mortgage).
How Can I Build Equity in My Home?
Part of understanding home equity is understanding how it builds.
Your home’s equity increases when:
-You pay down the principal balance of your loan
-The market value of your home increases
-While you can’t do much about the housing market (or the factors that impact it), you can control your mortgage payments. Paying more than your minimum monthly mortgage payment can allow you to build equity faster—not to mention save you money over the course of your loan.
Some borrowers prefer to submit an extra mortgage payment each year, which can also accomplish this task. Others pay their mortgage biweekly, which ends up paying off their loan as much as five years early. This also equates to more equity in a shorter period of time.
PRO TIP: Don’t forget to check with your lender before altering your payment schedule to ensure that you won’t be hit with fees or prepayment penalties.
How Can I Tap My Home Equity?
There are three main ways to tap into your home equity.
A home equity loan, also known as a second mortgage, lets you borrow money with your current home as collateral. You receive a lump-sum payment and, in exchange, you begin paying that money back on a set schedule, often with a fixed interest rate.
A cash-out refinance lets you take advantage of the equity and appreciation of your home. It replaces your current mortgage with a new loan that’s worth more than what you owe on the house. You pocket the difference, and you can use that money any way you like.
A HELOC (home equity line of credit) is a revolving credit line secured by your home that lets you access funds at your leisure. As you pay off your outstanding balance, your credit line replenishes—just as it would with a credit card. You do pay interest on a HELOC, but only on the credit you use, which is also like a credit card.
How Can I Use My Home Equity?
The money that’s created through your home’s equity is yours for whatever you like! Though every person and situation is different, there are a few popular ways to put your home equity to good use:
Home improvements: Use the money on repairs, renovations, upgrades, or expansions. Put in a pool, fix the roof, modernize the kitchen—the sky’s the limit when you’ve got equity in your pocket!
Debt consolidation: Pay off some or all of your high-interest credit card debts or other outstanding balances.
Down payment on another home: The home equity from your current home could help finance your next purchase when you use that cash for a down payment. Whether you’re after a second home, investment property, or vacation property, understanding home equity allows you to broaden your horizons—and even your housing portfolio.
Education: College ain’t cheap. There may be a variety of (super-valid) reasons why you don’t want to take on college debt. The equity in your home can prevent you and your children from accruing sizable student debt upon graduation.
Investments: Stocks, mutual funds, retirement accounts, even cryptocurrencies. We’re not financial experts, but we know real estate isn’t the only investment that’s paid off big-time over the past few years. Part of understanding home equity, however, is understanding that your home loan or line of credit must be paid back, so invest wisely.
How Has Home Equity Performed Lately?
The past five years have been amazing for most homeowners. In fact, a recent report by Black Knight found that the average U.S. household had $153,000 in tappable equity (most lenders will allow you to “tap” up to 80% or 85% of your built-up equity). In fact, homeowners with a mortgage gained more than $800 billion in tappable equity in the first quarter of 2021 alone. This represented an 11% increase in equity from the previous quarter and a 23% climb year over year.
Home equity can be a wonderful tool and investment vehicle. It’s also a great way to build wealth and put your money to work while remaining in your home—a home that could continue going up in value.
If you’re ready to talk about the benefits of building equity or buying a home, we’re ready to listen to all your questions. Give us a call today and get on the path to understanding home equity!