Home equity is the portion of your home, in terms of debt to a bank, that is truly yours. It’s the percentage of your home that you own without reservation. In simple terms, equity is the difference between what is owed on your mortgage loan and what your home is worth in terms of market value.
If you took a mortgage loan to acquire your home then you know that your bank or whatever organization you took the loan from has charges interest on that property until your debt is fully settled.
At the point where you bought your home, you are required to make a down payment on the property before you finalize your mortgage terms. That down payment and deposit is your initial “equity”. The good news is that equity can be built; it should be noted that building equity is a long term commitment that has long term benefits.
How do I build my home equity?
Buy a home in an area with increasing property values
Acquiring your home in a city/area that sees its property values go up is a good way to ensure your home equity grows. Getting a home in a sought after location can increase your home equity at a much higher rate than paying down the loan – depending of course on market conditions.
How A huge Down Payment Helps
Initially you are required to make a down payment on your home, making a huge down payment is a fast, if not the fastest way to build your home equity. The larger your down payment, the larger your equity upon closing your loan.
Your mortgage payment goes towards paying the principal and interest on the loan. The more you make your payments, the more equity you get. This works because the more you settle your debt, the less of the home your lender has an interest in. As you continue to make payments, more money per payment goes towards paying off the principal than the interest, so you’re building your equity at an increasing rate.
Another way to speed up your equity growth is by speeding up your repayments. The faster you make payments, the faster your equity grows. Some homeowners pay above the minimum amount that is required of them per month, meaning that they pay more money to pay down the principal of the loan faster. This also helps grow your home equity.
Home Improvement Projects
Embarking on remodeling and renovation projects help to up the value of your home in the market – especially when the real estate market is thriving. This is another way to help raise your home equity.
Using your home equity
As a homeowner you’ll find that home equity is useful in a number of ways, but what does that mean in practice? How can you utilize this home equity?
Sale of Your Property
You may find that in a few years, you’re ready to move out of your home – after all, chances are that you won’t live there forever. Selling your home is one way to get the home equity in the form of sale proceeds. When you sell your home you get sale proceeds or money from that sale, if you still haven’t finished paying off your mortgage, you could use money from the sale of the house to pay it off completely.
Home Equity Loans
These loans are popularly referred to as a ‘second mortgage’; you can take out a loan against the equity that you’ve grown. The amount you can borrow is limited by the amount of equity you have built up. Home equity loans are usually cheaper than normal loans as they often feature a lower interest rate.
It’s a good idea to retain 15-20% of your home equity when you take out a home equity loan, and tyou should repay the loans as soon as possible because. Failure to do so could lead to the lender taking your home to settle the debt. A lot of people take out loans like this to renovate their home and that can result in appreciation – and that turns straight into increased equity.
Planning to Use Your Home as the Basis For Retirement Funds
One type of loan – called a reverse mortgage – can be taken out against home equity to build up for retirement. This is a source of income to retirees and it’s only available to people who are over 62 who live in the home in question.
What Is A Home Equity Line of Credit (HELOC).
These are similar to the home equity loan in that you are still borrowing against your home equity. However; the home equity line of credit is often likened to a credit card in which the lender allows you to draw funds from that equity loan over a period of time. The structure of a home equity is different and more flexible. The loan is separated into two distinct phases. The draw phase and the repayment phase.
During the draw phase, you are eligible to pull out funds on the equity of your home when you see fit and you only have to make payments based on the interest. This draw phase lasts for a specified period of time as agreed by you and the lending organization.
At the end of the draw phase, you enter into the repayment phase in which you are no longer eligible to draw funds from your equity and you begin to start making payments on both the interest and the principal.
To qualify for a home equity loan and/or a HELOC you need to have a high credit score. Home equity can be considered a long-term investment and while the temptation to cash out on home equity by taking out loans might be very strong, it is advisable not to take out loans against your equity unless your financial situation is strong and stable.
If you’re interested in discovering the value of your home – and your equity – you can get an appraisal done professionally.