Understanding Home Equity
- 22 February, 2021
Many families decide to embark on their home ownership journey to build wealth for the long term. Part of building wealth through real estate is growing your home’s equity. This equity begins from the moment you buy your home and will continue as long as you own the home.
What is home equity?
Your equity in the home can be determined using one simple equation. The current market value of your home minus any mortgages on the property.
For example:
If your home were worth $350,000 and your current mortgage balance was $200,000 your current equity in the home would be $150,000 or 43% of the home’s total value.
This helps you understand not only home much of the property you own, but also how much the home has appreciated since you bought it.
Will my equity go up or down?
Your equity in the home will fluctuate as the market shifts to meet the demand of buyers in your local area. Your home’s equity could shift up or down depending on the:
- Economy
- Number of homeowners in your county
- Number of renters in your county
- Rate at which inflation occurs
- Unemployment rates
Unless you sell or refinance the home, your equity will always be subject to these factors.
How To Grow My Equity?
Renovations
Keeping your home in tip-top condition will help your home’s value grow. Whether you add a new kitchen or even a bathroom, make sure you speak with a professional to understand how much it will add to your home’s worth.
Market growth
According to Homelight, “the 25-year average appreciation rate of homes in the U.S. is 3.9%.”. This means that while homes tend to jump up and down in value, it should rise in value long term. This means that as you pay down your mortgage, your equity should increase year after year. Before making decisions on what to do with this equity, you should review your goals with a mortgage advisor.
How can I access more of my equity?
While your home’s value may have increased in the last few years, it is not liquid cash. This means that you can’t use this extra cash to pay down high-interest debt or take advantage of opportunities. However, lenders can help you tap into your equity for a variety of goals.
Cash-out refinance
The most common way in which families access their equity is through a cash-out refinance. This is where your current mortgage is paid off and a new mortgage is taken out for the new value of your home. Reasons for a cash-out refinance include:
- Paying off large balances on credit cards
- Paying for college for children
- Consolidating multiple loans into a lower interest payment
- Renovations on home
- Placing into a higher-yielding investment
HELOC (home equity line of credit)
A HELOC is like a credit card in which the lender approves a revolving line of credit against the equity in your home. This can be used for large purchases and as you pay back the balance, the credit replenishes. The money can be borrowed during the draw period and once that is over the borrower must repay all outstanding balances.
Interested in seeing if a refinance is right for you? Click here and speak with our refinance mortgage specialists today.
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