Home equity is one of the top reasons people decide to buy a home instead of rent one. When you take out a home loan, equity builds as you continue to make your mortgage payments. The more equity you build up, the greater an asset your home becomes. The equity you have in your home can be used for many things: from funding home improvements to helping you consolidate debt. If you are a homeowner who has been making mortgage payments for some time, you may be able to tap into your home equity.
Let’s take a closer look at what home equity is, and why it matters:
What Is Home Equity?
Home equity is the value of your home minus the mortgage debt you still owe on it. For example, if you own a home worth $300,000 and your current loan balance is $180,000, you have $120,000 worth of equity in your home. If the value of your home increases over time due to appreciation, your equity will also grow. This is what makes property such a valuable investment.
Every time you make a mortgage payment, a portion of the payment goes toward paying off the amount you’ve borrowed, known as the “principal”. The rest of your mortgage payment goes towards the loan’s interest. As the principal is paid down, your equity grows, giving you a way to potentially tap into those funds when you need to.
Many people falsely assume that the bank owns your home until you pay off your mortgage completely, but that is not the case. When you obtain a mortgage, your lender never “owns” the home, rather they have an “interest” in your property. In other words, your home is used as collateral for the loan. The amount of interest they have in your home is equal to the current mortgage balance you have. So, the total value of your home equals: Your Equity + Your Lender’s Interest in the Home. As you pay down your mortgage, your equity increases, and the lender’s interest in your property decreases.
How Can You Use Home Equity to Your Advantage?
As your home equity grows, it may become possible for you to take out another loan – a home equity loan - to tap into some of those funds. Another option is to take out a home equity line of credit. Like a home equity loan, a home equity line of credit allows you to tap in the equity you have in your home, but rather than providing the funds to you in a lump sum, you can access the funds you need in more of a credit card format, accessing the funds you need as you need them, over an agreed-upon period of time. Like a credit card, as you pay off your line of credit balance, those funds will become available for you to use again.
With both a home equity loan and home equity line of credit, because your home is used as collateral, you are likely to obtain a lower interest rate than you would with an unsecured loan – such as a personal loan. Home equity loans and lines of credit can be used for many purposes, including:
If you’re interested in tapping into your equity through a home equity loan or home equity line of credit, don’t hesitate to contact us today.
Let’s take a closer look at what home equity is, and why it matters:
What Is Home Equity?
Home equity is the value of your home minus the mortgage debt you still owe on it. For example, if you own a home worth $300,000 and your current loan balance is $180,000, you have $120,000 worth of equity in your home. If the value of your home increases over time due to appreciation, your equity will also grow. This is what makes property such a valuable investment.
Every time you make a mortgage payment, a portion of the payment goes toward paying off the amount you’ve borrowed, known as the “principal”. The rest of your mortgage payment goes towards the loan’s interest. As the principal is paid down, your equity grows, giving you a way to potentially tap into those funds when you need to.
Many people falsely assume that the bank owns your home until you pay off your mortgage completely, but that is not the case. When you obtain a mortgage, your lender never “owns” the home, rather they have an “interest” in your property. In other words, your home is used as collateral for the loan. The amount of interest they have in your home is equal to the current mortgage balance you have. So, the total value of your home equals: Your Equity + Your Lender’s Interest in the Home. As you pay down your mortgage, your equity increases, and the lender’s interest in your property decreases.
How Can You Use Home Equity to Your Advantage?
As your home equity grows, it may become possible for you to take out another loan – a home equity loan - to tap into some of those funds. Another option is to take out a home equity line of credit. Like a home equity loan, a home equity line of credit allows you to tap in the equity you have in your home, but rather than providing the funds to you in a lump sum, you can access the funds you need in more of a credit card format, accessing the funds you need as you need them, over an agreed-upon period of time. Like a credit card, as you pay off your line of credit balance, those funds will become available for you to use again.
With both a home equity loan and home equity line of credit, because your home is used as collateral, you are likely to obtain a lower interest rate than you would with an unsecured loan – such as a personal loan. Home equity loans and lines of credit can be used for many purposes, including:
- Paying Off Other Debts. If you carry debt across multiple loans and credit cards, you may consider consolidating your debt into one convenient payment. In many cases, a home equity loan can be used to do just that. For example, if you have multiple credit cards with high interest rates and you qualify for a home equity loan, you may be able to use the funds from that loan to pay off all of your cards. Not only will this remove all of your various credit card payments and replace them with one manageable loan payment, but the home equity loan’s interest rate will likely be much lower than the interest rate you were paying on the credit cards.
- Paying for Home Improvements. Another way to use home equity is to put the money right back into your home. Installing a new roof, adding more living space, finishing your basement – there is no limit to what you can do with the amount of home equity you are approved for. A home equity loan can also help you pay for needed repairs at a lower interest rate than you’d typically receive if financing through a personal loan. Home renovations and improvements can add significant value to your home, therefore helping your equity to grow even more.
- Funding Your Retirement. Some people may be able to use the equity from their home to fund their retirement accounts. Remember though, that there are significant risks involved with investing. It’s always a good idea to sit down with an investment professional or financial advisor to talk through your financial goals and current situation before making any drastic changes to your investing habits or your financial portfolio.
- Almost Any Other Purpose! In most cases, you can use home equity for many other needs, including funding long-term medical care, cosmetic or necessary surgeries, college tuition, dream vacations, and more.
If you’re interested in tapping into your equity through a home equity loan or home equity line of credit, don’t hesitate to contact us today.