If you are planning to grow your home equity or someday intend to be a homeowner, then you must know that having equity is a good thing. We’ve simplified the basics of home equity, what it means for you as a homeowner and how to take advantage of your home equity.
Home Equity Breakdown
Your home equity is a percentage of your home that you own outright. You are the owner of your house, but if you took out a mortgage to buy it, the fact is that your lender also has an interest in your property. As you pay down your mortgage your home equity grows, and the lender’s interest shrinks.
To find out how much equity you have, first, you need to know your home’s worth and what you owe on your mortgage. You can find out exactly how much your home is worth by having an appraisal done on your house or you can get an approximate figure by having a real estate agent prepare a comparative market analysis. Online valuation tools are also a possibility, but they may not always be accurate so talking to a professional is highly recommended.
Once you have that information in hand, subtract the amount that you owe on your mortgage from the value of your home. The remainder is your home equity.
Growing your home equity
Every time you make a mortgage payment, your home equity slowly increases. In addition to making monthly mortgage payments, you can also grow your home equity by increasing the value of your home. To increase the value yourself, you can make improvements or make additions to your home that would boost its resale value. The neighborhood you live in could also begin to appreciate in value, thus potentially increasing the value of your home.
Once you build up your home equity you can use it to your advantage for a home equity loan, home equity line of credit, cash-out refinance or use it to move into a bigger home.
A cash-out refinance loan is a new loan - usually one with better terms - to pay off and replace your old one. Generally, the loan amount is larger than the remaining balance on your current mortgage. In order to get cash back from the equity in your home, you refinance with a cash-out mortgage. The cash back you receive may be used on anything from home improvements to college tuition. You may be able to borrow up to 85-90% of your home’s value.
Home Equity Loan
The home equity loan, also known as second mortgages, are loans where the equity of your home is used as collateral. You’re still responsible for making regular monthly payments to pay back the money you borrowed. The home equity loan is also distributed in full such as when you first bought your home.
Home Equity Line of Credit
A home equity line of credit is like an equity loan; however, think of a HELOC like using a credit card, where a maximum loan amount is determined, and you take out as much money as you need as long as you don’t surpass the limit. HELOC loans also give you a draw period from which you can continuously draw money out as needed, usually up to 10 years. After the draw period, you enter the repayment period, which varies from lender to lender.
Buy a bigger home
Last, but not least, more home equity means more money made when it’s time to sell your home, which could put you in a bigger home or a home that you’d owe much less on.
If you’d like to learn more about your home equity and how you can use it to your advantage or help lower your debt, contact your real estate professional or First Bank mortgage consultant for more information!