Learn why having equity in your home is a wonderful thing, and the many ways you can leverage that equity to make the most of your money.
Understanding Home Equity
Home equity is the portion of your home that you own outright, or have paid off. It is the difference between the current market value of your home and the outstanding balance on your mortgage.
To understand your home equity, you can calculate it by subtracting the outstanding balance on your mortgage from the current market value of your home. For example, if your home is worth $300,000 and you have a mortgage balance of $200,000, your home equity would be $100,000. This means you own $100,000 of your home outright.
Another way to think about home equity is as a savings account for your home. It is the portion of the home that you can borrow against or use to make home improvements or other large purchases.
Benefits of Having Equity in your Home
There are several benefits of having equity in your home:
- Access to funding: Having equity in your home can provide access to funding for expenses such as home improvements, education, medical, or to pay off other debts, by means of a home equity loan or a home equity line of credit (HELOC).
- Lower interest rates: Home equity loans and HELOCs are typically secured by the equity in your home, which makes them less risky for lenders. As a result, they often have lower interest rates than unsecured loans, such as personal loans or credit cards.
- Tax-deductible interest: The interest on home equity loans and HELOCs is tax-deductible if the loan is used for home improvements.
- Refinancing opportunities: Having equity in your home gives you more options for refinancing your primary mortgage for a lower interest rate or for a longer term, which can help lower your monthly payments.
- Equity can be used as collateral: Equity in your home can be used as collateral for other loans or credit lines, which can be a useful option if you don’t have other assets or savings to use as collateral.
It’s important to keep in mind that using your home equity as collateral for a loan puts your home at risk if you are unable to make payments. It’s essential to consider the costs, risks and your ability to repay before using your home equity. By understanding your home equity, you can make informed decisions about your mortgage and finances, such as when to refinance, when to take out a home equity loan, or when to make home improvements.
How do I Increase my Home Equity?
There are several ways to increase your home equity:
- Pay off your mortgage: The most obvious way to increase your home equity is to pay off your mortgage. The more you pay down your mortgage balance, the more equity you will have in your home.
- Make home improvements: Improving your home can increase its value and therefore your home equity. Consider making updates to the kitchen or bathroom, finishing a basement, or adding a bedroom or bathroom.
- Wait for your home’s value to appreciate: Over time, the value of your home may appreciate due to market conditions, inflation, and other factors. As the value of your home increases, so does your home equity.
- Pay down other debts: Paying off other debts, such as credit cards or car loans, can help you qualify for a refinance and lower your mortgage interest rate which can increase your equity over time.
Keep in mind that your home equity can fluctuate with the market. The value of your home can rise or fall depending on the current real estate market conditions. If the value of your home increases, your home equity will increase as well. Conversely, if the value of your home decreases, your home equity will decrease. Track your home equity over time to understand how it’s changing and to make informed decisions about your mortgage and finances. While home equity can fluctuate in the short term, it tends to increase over the long term.