If you are a homeowner or a homebuyer, then you've probably heard of the term "home equity." But what is home equity, and how can it help grow your wealth?
What is Home Equity?
Home equity is the difference between your property's current market value and the amount you still owe on your mortgage loan
. For example, if your mortgage balance is $120,000, and your home's value is $400,000, then your equity is $280,000. Simply put, home equity is the portion of your property that you truly own.
There are two ways your home equity can increase:
- You pay down more of your mortgage loan.
- The market value of your home increases.
Home equity is a valuable asset. That's why it is essential to know how it works and how to use it wisely.
How Does Home Equity Work?
When you purchase a home with a mortgage loan
, although you are the homeowner, it's not entirely yours. At least not yet. The mortgage lender has a financial share in the property until you pay off the loan completely. But this does not mean that they "own" a part of your property. Your house only serves as collateral to your loan.
If you purchased the property with a down payment, that means you already have equity. And as you make your monthly mortgage payment, you're adding more to your home equity since a portion of your monthly repayment goes to the outstanding principal.
The other way for your equity to increase is when the value of your home increases over time. Many factors can affect the appreciation or depreciation of your home's value. Examples of these factors are home improvements, location, or the economy.
How To Build Your Home Equity
Having equity is the greatest advantage of owning a home compared to renting. With renting, your payment goes to your landlord's equity instead of yours. For most homeowners, having built up home equity is their biggest financial asset. So here are some of the steps you can take as a homeowner to increase your home equity.
- Pay Off Your Mortgage: With standard loans, part of your repayment goes to the interest, and the other part goes to the principal. As you pay off your mortgage, your equity also increases over time.
- Upgrade Your Home: Upgrading your home does not have to be a huge and expensive project. It can be as simple as painting the walls or repairing the fixtures. Making your house look more beautiful not only increases its appeal to future buyers but also allows you to live in a cozy and pretty home.
- Pay More Than You Need To: The more mortgage payments you make, the faster your equity grows. For example, instead of paying $2000 per month, you can make it to $2500. Or you can send your repayments bi-weekly. If that's not possible, you can make an additional payment per year.
How You Can Use Home Equity
Now that you know what equity is and how to build it, you should know how to put it to work for you.
Since home equity is an asset, you can use it to fund what matters to you, or let it grow and pass it on as an inheritance. If ever you decide to use it, here are several ways to use this asset:
- Buy A New Home: People move for many reasons: growing families, different job opportunities, or simply for a change of pace. Whatever the reason is, home equity can help make a move possible. You can use this money to make a bigger down payment on the new house or afford a more expensive and better home.
- Consolidate Debts: You can use a home equity loan to combine your high-interest debts into one monthly payment with lower interest. Focusing on paying off your home equity loan might also help you get out of debt faster.
- Borrow Against Your Equity: You can get a home equity loan to fund anything, such as an expensive home improvement or your children's college expenses. But keep in mind that as a homeowner, your goal is to build your home equity. Borrowing too much against your equity is not advisable, so work with a trusted mortgage broker like Ebenezer Mortgage Solutions to help you make sound financial decisions.
- Fund Your Retirement: If you're older than 62 years old and want to tap into your home equity, you can do so by applying for a reverse mortgage. You can use this money as your retirement income without having to pay monthly payments. However, you still have to take care of your home by paying taxes and insurance.
Home equity is a reliable way for homeowners to build wealth. It can allow you to enjoy better things or take you out of difficult situations. However, before you tap into it, it's best to consider it wisely because, just like anything else of value, it takes time to build your equity.
Are you thinking of applying for a home loan or refinance your current mortgage
? Make the experience easier with the help of Ebenezer Mortgage Solutions
. Call us today at (813) 284 - 4027
and let our mortgage brokers do the hard work for you.