How Home Equity Works: The Ultimate Guide

equity works

There are a lot of reasons to own a home. But one thing that people forget about is their home equity.

With home values rising, there’s no better time to take advantage of your equity. But before you do, it’s important to understand what equity is and how home equity works. Keep reading to learn everything you need to know.

What Is Home Equity?

Before you learn what home equity can do for you, it’s essential to understand what it is. The good news is, it isn’t complicated.

Your home equity is the amount of your home you own vs. how much you owe on your mortgage. Take a home that is worth $100,000. If you owe $40,000, then you have $60,000 in home equity.

You can’t base your home value on the amount you paid for your home. Home values typically increase in value over time. If you want to get the real value of your home equity, make sure to have an assessor examine your property to figure out how much your home is actually worth.

What Can You Do with Home Equity?

The amount of home equity you have isn’t only a number that shows you how much of your home you own. It also gives you financial options. Below are a few things you can use your home equity for.

1. Consolidate Debt

It isn’t good to hold a lot of high-interest debt. If you have high balances, you usually end up paying more in interest than you do on your principal balance. Unfortunately, a lot of people have this problem.

You can use your home equity to get yourself out of this situation.

Your interest rate for a home equity loan will likely be at a much lower interest rate than your high-interest loans. Take out a loan to cover your debt and focus on repaying your home loan. You’ll end up spending much less in interest in the long run.

2. Home Repair

Is your house starting to fall apart? Repairing things can get expensive. You can use your home equity to pay your bill.

If you have a lot of improvements to make, a home equity line of credit may be the answer. It allows you to draw only the money you need. You’ll only need to repay the amount you borrow and not have to worry about a large lump sum.

3. Cash-Out Refinance

You have options if you’ve built up a lot of equity in your home. It’s time to see if you can get a better deal.

When you refinance your home, you take out a second mortgage. You can take advantage of lower interest rates and better credit to get a better deal. Most of the time, you will end up with lower monthly payments and a better interest rate.

If you’ve paid off a lot of your mortgage, you can also end up with a lump sum after you refinance. You can use this money in whatever way you wish.

4. Fund Your Next Home

Not everyone to live in one place for the rest of their lives. The good news is you aren’t out of luck when you have equity in your home.

You have two options when you decide to move. You can either sell your home or continue paying on your current mortgage while renting out your house.

When you sell your home, you’ll get a lump sum if you have a large amount of equity in your home. You can use this money as a down payment for your future home.

If you decide to rent out your home, you can use your home equity as collateral for your new mortgage. Doing this will allow you to get favorable rates with your mortgage company.

Keeping a rental allows you to retain and continue building your equity in your old home while building equity in a new property.

How Does Your Home Equity Increase?

As you can see, having home equity can increase your financial options. The question is, how can you improve how your home equity works for you?

1. Pay off Your Mortgage

Your monthly mortgage payment can be broken down into two categories: your interest and your principal balance. While your loanĀ interest won’t do anything for your equity, every penny you pay on your principal balance will increase your equity.

If you want to increase your equity faster, you’ll need to pay off more of your principal. Consider paying a little extra on your mortgage every month.

2. Renovate Your Home

Making improvements to your home doesn’t only make it more pleasant to live in. It can also increase the value of your home.

If you decide to renovate to increase your equity, pick your projects carefully. Only take on projects that provide more equity than the project cost. Doing this ensures you can recoup your investment whenever you decide to draw on your equity or sell your property.

3. Market Increases

Do you live in an attractive or up and coming neighborhood? The good news is you can use this to your advantage. Up and coming areas usually see home values increase.

As the value of homes in your area goes up, so does your equity. If you plan on your equity increasing because of a rising market, then plan on holding onto your property for a long time.

Now You Know How Home Equity Works

Now that you know more about how home equity works, you should have a better idea about the things you can do with it. It’s much more than how much of your home you owe, so figure out how you can best make use of your equity in your home.

Are you using the equity in your home to buy a new house? You need to find a reputable buyer to sell your home to after you find your new home. Click here to learn about our process and set up a time to speak with us about selling your home.