The term equity is the ownership of assets associated with liabilities or debts. In a mortgage, equity is the portion of your home that you truly ‘own’. Until you clear off your mortgage, your lender will always have an interest in your property. For many homeowners, equity can be a powerful tool. Considering that it increases through your monthly mortgage payments, the list of ways home equity can benefit you is endless.
Three years later, assuming you have been paying the mortgage on time and currently have a mortgage balance of $250,000. To calculate your home equity, you must find out the current value of your home. If the value has jumped to $310,000, you have an equity of $310,000 minus the mortgage balance of $250,000, which is $60,000.
When calculating home equity, two critical factors have to be considered. One is the home’s current value, which can best be determined by an official valuator who will use current markets. The second thing is the mortgage balance.
1. Paying Off Mortgage
With each payment, the money is allocated to the principal balance, loan interest, property taxes, and other costs. The longer you pay off your mortgage, the lower your principal balance gets. Please note that not all loans work this way. You must confirm if your monthly payments deduct the principal balance. Lest this method won’t be very effective at building equity.
2. Make a Significant Down Payment
This is the quickest way to build equity. For a home that costs $300,000, if you make a down payment of $60,000, that’s the amount that will stand as your equity.
3. Pay Extra on the Monthly Installments
This can be challenging because of financial constraints. But if you have the ability, paying more will lower the principal balance and build more equity.
4. Increase the Value of Your Home
When it comes to increasing home value, certain strategies come into play. The first is conducting a renovation. Renovating your home to modern designs and standards adds value. You can also remodel the kitchen or add an extra bedroom or bathroom(s).
Landscaping also contributes to the same. There is another method that doesn’t involve costly renovations, and that is staying in your home for at least five years. Most homes add value after a while. Depending on your home’s market, you may notice a significant jump in prices. That will boost your equity.
What are the Uses/Benefits of Home Equity?
1. Buy a Bigger Home
Having built a significant amount of equity, you are assured of walking away with the equity as profit when you decide to move home. That money can be used to make a large down payment on a much bigger and better home.
2. Get a Reverse Mortgage
Home equity can be used to get a reverse mortgage for those considering retirement. This will see you or your loved one receive a one-time lump sum or installments for retirement.
3. Home Equity Loans
This type of loan allows you to borrow from your equity and use the funds however you please. A home equity loan is often slightly lower than the current equity. And it also comes with interest. The funds obtained from a home equity loan can be used to pay for tuition, home renovations, and other expenses the homeowner may have.
4. Opt for Cash-Out Refinance
You can ‘cash out’ your equity with this type of loan by getting a new mortgage with a higher loan amount. This is an excellent way of utilizing your home equity to get money for various expenses.
Home equity is an asset that can come in handy in many situations. There are many ways to utilize your home equity such as cash-out refinance and home equity loans, so taking the necessary measures to build it is crucial.