There are many benefits of buying a home, but one of the biggest is building equity. But what exactly is home equity, and how can it be used to your advantage? Let’s take a closer look at home equity and how it can be such an advantageous financial tool.
Home equity explained
In a nutshell, home equity is the amount you owe on your mortgage minus what your home is worth in today’s market. So let’s say you still owe $150,000 on your home and that it’s worth $200,000. That means you have $50,000 worth of equity in your home.
How equity increases and decreases
There are a couple of ways that you can increase your home equity. The first is to pay down your mortgage. The more you’ve paid, the more equity you have in your home. The second way is for your home value to increase. The more that value jumps, the more equity you have. On the flip side, your equity can decrease if your home decreases in value faster than you’re paying down your mortgage.
Calculating your equity
In order to understand how much equity you have in your home, you need to know its current value. The best way to determine your home’s value is to talk with a professional real estate agent. Once you know how much your home is worth, subtract the balance of your mortgage and any other home-related debts you’re carrying. The resulting number is your home equity.
Using equity to buy another home
If you currently own your home and you’re looking to upgrade, then you can use your equity to help finance the purchase. When you sell your home, your equity will be the profit you make on the sale (minus fees and closing costs). You can then use that profit to make the down payment on your next home. For many homeowners, this can mean making a sizable down payment, giving you the ability to afford a larger, more expensive home and still have a smaller mortgage.
Taking out a home equity loan
You can also borrow against your home equity. One way is to take out a home equity loan, which is like a second mortgage. If you have $50,000 in equity, you may qualify for a $40,000 loan. You would receive that money in a lump-sum payment from your lender to use however you like. You would then make monthly payments on that loan, just like you would with your primary mortgage.
Using a home equity line of credit
You can also get a home equity line of credit (HELOC) to use like a credit card. If you qualify for $40,000 worth of credit, then you can use that money for things like a kitchen renovation. In this scenario, you only pay back what you borrow.
Refinancing for more than you owe
Finally, with your equity you may also qualify for a cash-out refinance. In this case, you would refinance your mortgage for more than what you owe. You would receive the extra money in cash to do with as you please. You would then repay the new amount in monthly installments with interest.
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