Maybe you’ve heard of “home equity” before. But do you know what it means? It sounds complex, but don’t worry. It’s actually a simple concept!
So, to help, here's the meaning of home equity, why it matters, and how to use it to your advantage.
Home Equity Meaning
We can define home equity quite easily.
Home equity is just the difference between what your home is worth and how much you owe in mortgages and liens. In other words, it’s how much of the property you actually own.
For example, say you have a home in Sedona, AZ worth $500,000. You owe $350,000 in home loans. Your equity is $150,000, since that’s how much you own outright.
As you pay down your home loan, your equity normally increases. But there's always the risk that your home’s market value will fall.
So, sticking with our example, say you owe $350,000 still on your home loan. The market crashes and the home is now only worth $300,000. You’re now in negative equity.
Reassuringly, we’re seeing a decrease in the number of homes with negative equity. This means that it could be a good time to consider shopping for a home loan!
How to Calculate Home Equity
It’s simple to calculate home equity. All you must do is deduct the amount of any debt over the property from the current market value.
So, say you have a property worth $100,000. You have a secured loan of $5,000 and a mortgage of $30,000. You have equity to the value of $75,000 since that’s what you own. The other $35,000 is burdened with debt.
Can You Use Home Equity?
Yes! You can free up the cash “tied up” in your property and use it for other things. The most common reasons for freeing up or using home equity are:
Normally, you will release equity through a home equity loan. You are essentially “borrowing” against your home to free up the cash locked within. It’s like a mortgage, in many ways.
Can you use home equity for non-essential purchases? Technically, yes. However, you must consider if it’s worth taking out money from your home just to fund leisure purchases.
How to Take Equity Out of a Home
If you wish to “release” equity from your home, the process can seem complex. However, it’s fairly straightforward. The most common ways to release home equity are as follows.
Home equity loan
A fixed loan where you get a lump sum payment and repay it over time. This is usually via monthly installments.
Home equity line of credit (HELOC)
Like a credit card, a HELOC lets you draw down money. You draw down and repay it as often as needed for a set period.
With these options in mind, should you use home equity? It all depends on your circumstances. To help you decide, here are the pros of cons of using home equity.
pros.
Pros of Using Home Equity
The upsides to using home equity are:
Security
Giving you freedom and peace of mind in an emergency.
Value
Making your home’s value “work” for you – and potentially increasing this value by e.g. making improvements.
Simplicity
Home equity loans are often simple to obtain because they’re secured against your home.
Freedom
If you know exactly how much you need, home equity loans can offer a quick and steady cash stream.
cons.
Cons of Using Home Equity
All that said, the drawbacks of unlocking home equity through a home loan are:
Risk
A secured loan puts your home at risk if you fall behind on monthly repayments.
Debt
Remember, you’ll still have mortgage payments. Paying both loans could be financially too difficult for you.
Ease of access
The simplicity of applying for home equity loans can also be a negative. It can be easy to fall into a trap of borrowing more than you need.
How to Build Home Equity
Do you want to increase your home’s value? Then the good news is you can build home equity quite easily. Here are some tips for boosting the equity available in your home.
1.
Increase your monthly mortgage payments. Higher monthly payments mean you’ll pay down the loan quicker.
2.
Pay down the principal balance rather than the interest. This is the most efficient way to increase your ownership and reduce interest payments since the loan balance drops.
3.
If you don’t need private mortgage insurance (PMI), then consider avoiding it. Once you have enough equity in your home to satisfy your lender’s requirements, ask for PMI to stop.
4.
Consider refinancing to unlock better mortgage terms or payment arrangements.
5.
Increase your home’s value by making renovations, such as boosting energy efficiency with solar panels.
Unlock Your Home’s Value Today!
Are you ready to make the most of your home’s value? Then let Scout Mortgage help!
We’re passionate about helping homeowners tap into their property’s value to meet their financial needs. Whatever your goals, we can find a home equity loan to support you. We’ll walk you through the entire application process and answer any questions you might have.
From quick and easy mortgage approvals to reliable advice, we’re ready to serve. Contact us now to discuss a home equity loan quote and unlock your home’s value!