What does “Home Equity” mean and how does it work? If you have ever wondered what home equity means and how it works, or if you are searching for ways to use your equity, read through this review till the end for a detailed overview of the term.
In the meantime, one of the simplest and easiest ways to accumulate wealth is through homeownership. Growing your equity, which eventually transforms your debt into an asset, is a critical component of this strategy. That is why it is imperative to know and understand what equity loans are all about.
What is Home Equity and How Does it Work?
The value of a homeowner’s equity in their property is referred to as “home equity.” It is, in other words, the present market value of the property. Another meaning of the term is the difference between the amount you owe on your mortgage and the current market value of your home.
To illustrate this, if you owe $50,000 on your mortgage loan and your home is currently worth $200,000, you have $150,000 of equity in your home. However, your mortgage lender doesn’t have any claim to your property except you obtain a shared equity mortgage and based on research, this isn’t common.
Your home still belongs to you. But it has been used as collateral for your loans. And your lender uses it to secure their interest. It is worthwhile to note that your equity can either increase or decrease due to different factors. As more mortgage payments are made and market forces influence the property’s current value, the amount of equity in a house or its worth fluctuates over time.
How do I Build My Home Equity?
As a homeowner, there are several ways to build and grow your equity. In this section of the article, we will be providing you with various ways to effectively and efficiently grow your equity. Here are some of the best ways:
Make a Large Deposit
One of the easiest and fastest ways to build your home equity efficiently and effectively is by making a large deposit. The bigger your deposit, the more equity you will automatically have in your house. Besides, this will enable you to quickly clear all your outstanding debt and gain full ownership of your home.
For instance, if you buy a house worth $180,000 and you deposit $10,000, you will owe $170,000 on your mortgage and this will leave you with $10,000 equity. However, if you make a deposit of $20,000, you will owe $160,000 on a home worth $180,000, which leaves you with $20,000 Equity. Having $20,000 equity is far better than $10,000.
Try Paying off Your Mortgage
The best way to build your equity is by paying off your mortgage, as this can help reduce your principal balance. As you know, any amount paid will help reduce your principal balance, while the rest will go towards paying interest, homeowner’s insurance, and property taxes.
When you start paying off your mortgage loan, a smaller amount will cover your principal balance and the rest will cover your interest. The good news is that the longer you have your mortgage, the more money you’ll put toward paying down your principle and increasing your equity. Note that not only lenders operate this way.
Renovate Your Home and Improve Its Curb Appeal
You can also improve or build your home equity by renovating your home and improving its curb appeal. To do this, you can add an extra bedroom and also renovate your old kitchen, master bathroom, and more. Investing in the general improvement of your house can go a long way toward helping you build your equity.
How to Use Your Home Equity
The best way to use your equity is by borrowing against it; this is known as getting a second mortgage. This will enable you to access your equity while you’re still alive. Based on our research, the three most effective ways to borrow against your home equity are to apply for a home equity loan, Home Equity Line of Credit (HELOC), and cash-out refinance.
Getting a home equity loan enables you to pay the loan back in monthly installments with interest. HELOC which is otherwise known as a Home Equity Line of Credit is like a credit card tied to the equity of your home.
This allows you to pull funds as you need them, and you will only get to pay interest on what you borrow. On the other hand, Cash Out Reliance allows you to refinance for more than what you owe on your home mortgage. Nonetheless, your goal should be to learn to build great equity.
Aside from borrowing against your equity, you can also fund your retirement to effectively use it. You won’t be required to pay a monthly payment as the loan will only be repaid when you leave the house. The last way to use it is by selling your current home and buying a new one.