As you make payments and reduce your mortgage balance, you build up equity in your home.
So, what can you do with home equity, and how you do know how much you have?
First, let’s define home equity.
Simply put, home equity is the difference between the appraised value of your home and amount owed on loans secured by your home.
Over time, as you make mortgage payments and your home’s resale value rises, the amount of equity in your home grows.
It is important to know the amount of equity in your home, because you can use it as a financial tool. You may choose to access the equity you have built to obtain a home equity loan or home equity line of credit, commonly referred to as HELOC, to help pay for your children’s college education, fund the addition of a new master bedroom or pay down high-interest credit card debt.
It’s relatively easy to get a general sense of how much equity you have in your home. You can estimate your home’s value yourself by analyzing recent home sales in your neighborhood or using an online home price estimator tool.
Though to get a more accurate value, you’ll need to enlist the services of a real estate appraiser. You should know that an appraisal is not free. Depending on the size and location of your home, you can expect to pay an appraiser about $400 to determine the market value of your home.
Once you know the market value of your home, you can calculate the amount of equity you have by subtracting the outstanding balance of your mortgage and any other loans secured by your home from the market value.
Say you owe https://cashbonus.org/payday-loans/ $200,000 on your mortgage and your home is now worth $300,000. That is an easy one: your home equity is $100,000.
If housing prices have fallen since you purchased your home, it is possible you have lost equity or have negative equity, or to be ‘upside down’ on your mortgage. For the same example of owing $200,000 on your mortgage, if falling home prices make your home currently worth only $150,000, you now have a negative equity of $50,000.
Once you determine your home’s equity, how can you use it to your advantage? You may turn positive home equity into cash by borrowing against your home through a home equity loan or home equity line of credit. In most cases, the amount you can borrow is limited to 80% of the appraised value of your home, and this includes the outstanding balance of your existing mortgage.
If you take out a home equity loan, you’ll receive a one-time lump sum of cash that you then pay back monthly over a set period of time, usually 10 or 15 years. Home equity loans typically have a fixed interest rate, meaning that you’ll make the same payment amount each month for the term of the loan.
A home equity line of credit, however, is typically a revolving line of credit that works much like a credit card. If you have a $50,000 home equity line of credit, you can borrow $10,000 and still have $40,000 left available on your line of credit. Your monthly payment amount is calculated on the $10,000 borrowed, not the full credit line. As you pay back the amount borrowed, you are able to borrow those funds again.
Keep in mind that, like a credit card, you can’t borrow anything if you’ve maxed out your line of credit until repayment is made.
You can use your loan or line of credit to pay for projects like a kitchen renovation or installing energy efficient windows. You may want to pay down high-interest debt or use your equity for college tuition.
It’s important to remember that when taking out a home equity line of credit or home equity loan, the collateral is your home. Make sure to budget well and not overextend yourself putting your home at risk. It’s wiser to use a home equity loan or line of credit for long-term investments, rather than everyday expenses.
There are several ways to build equity in your home.
Making a large down payment when you purchase your home is a good first step. You’ll owe less on your home right off the bat and will have that equity available to you in the future.
If your budget allows, add extra to the principle payment when paying your mortgage each month or make a large principle payment once a year. Over the life of your loan, this will allow you to pay off your mortgage more quickly and reduce the total amount of interest you pay. The less you owe on your home, the more equity you have.
You can also boost your home equity by increasing your home’s value. Maintaining your property and making improvements along the way will add value to your home. The housing market changes often, but you’ll likely see your home increase in value if you stay in your home for at least five years.