Basics of Home Equity
If you’re a homeowner, or will be, you’ve likely been told that you need to build home equity. This term gets thrown around a lot, but what does it actually mean and how is it useful?
When you borrow money to buy your home, you are considered a homeowner but the lender will continue to have an interest in the property until your loan is paid off. Equity is the difference between what your home is worth and what you owe on your mortgage. In other words, the part that your lender has no interest in. For example, if you owe $250,000 on your mortgage loan and your home is worth $350,000, you have $100,000 of equity in your home. What it boils down to is that you own $100,000 worth of your home.
Building It Up
- Monthly Payments. Because your interest rate is based on the amount owing, most of your monthly payments will go towards interest for the first little while. But as you pay down the principal slowly but surely, that amount will lower and more of your bill will reflect the principal amount.
- Increase the Value. Your home equity is based on its market value. As the value of your home increases, your equity is worth more. Homeowners can help this along by performing cost-effective renovations and improvements that will raise the market value.
- Accelerated Payments. Paying a little extra every year can go a long way in building your equity faster as well as paying off your mortgage sooner. For example, instead of paying your mortgage bill once a month, split it into biweekly payments. Instead of only making 12 full payments, you’ll make a 13th payment each year and cut down your principal that much faster!
Using It Effectively
Having a large amount of home equity isn’t just a participation medal, it can be used to achieve other financial goals.
- Selling your home means your lender gets whatever you still owe on the mortgage and you get to keep the rest! You can use this for whatever you would like, no strings attached. Examples include purchasing your next home, building your savings, or buying that dream car.
- You can borrow against your equity through a home equity loan, line of credit, or even a reverse mortgage. Each of these mortgage products has its own set of requirements so be sure to work with a broker who can help you read the fine print.
- Some homeowners build equity so that they have something to leave their loved ones when they pass on. This is a great way to keep your assets protected while ensuring your family is supported for years to come.
Home equity is a great tool for homeowners to achieve greater financial freedom. And after all, isn’t that why you bought your home in the first place? Once you’re ready to transform your equity into cash, our team of mortgage professionals can get you started. Give us a call to chat about your options and learn how you can use your hard-earned equity!