One of the many advantages of homeownership is the ability to build equity. Although you may know that equity is a great thing, you may not be aware of how to use it. This guide will help you learn more about home equity, and the different ways it can be used.
Talk to your financial advisor before you decide how to use your equity in your home.
What is home equity?
Equity is the difference between your home’s fair market value and the amount you owe on your mortgage. For example, if you still owe $100,000 on your mortgage, and your home is worth $250,000, you have $150,000 of equity in your home.
Equity doesn’t just mean paying off your mortgage. Equity can be affected by many factors. Equity will increase if your home’s worth increases over time. However, there are some situations that can negatively impact your equity. For example, if your home’s worth decreases while you pay off your mortgage, this could be a negative sign. Learn more about factors that affect your home’s equity here.
To determine how much equity you have, an appraisal or a comparative market analysis by a real-estate agent will help you determine the fair market value. There are many online tools that can help you estimate the value of your home, but you need to know how much equity you have.
How to use home equity
There are many ways to use your home equity. You can use your equity to make a down payment for a new house. Most equity will be returned to you when you sell your home.
You can also borrow against your home equity. Talk to a mortgage professional before making this decision. This will affect your current mortgage.
are three of the most popular ways you can borrow against your equity.
- Home equity loans: Also known as a second mortgage, this is paid out in a lump sum and repaid in monthly payments at a fixed interest rate for the life of the loan.
- Home equity lines of credit (HELOC): This is similar to a credit card and is a line of credit with a limit for how much you can borrow and for how long with a variable interest rate.
- Cash-out refinancing: This option creates a larger mortgage on your home. This new mortgage will be used to pay off your original mortgage and allow you to take the difference in cash.
To obtain one of these options you will need to go through the same process as you did to get your original mortgage. To determine the value of your home, a lender will use personal information such as your credit score, debt-to-income ratio, and annual income to decide if and how much to approve your application.
Once your decision has been made and you have been approved, there are many ways you can use the money. Upgrading your living space is one of the most popular ways that people use their home equity. You can increase your home’s overall value by investing in home improvements such as a kitchen remodel and an addition. This will help you build more equity. Before making any final decisions, speak to a realty professional about the potential return on investment (ROI) and its impact on your home’s resale price.
Your home equity is a valuable asset that you should use to improve your financial position.