The Basics of Home Equity

One of the benefits of owning a home is the ability to build equity and tap into that to pay for major expenses like remodels, debt or tuition. But what exactly is home equity and how can you use it? We break down the basics of home equity to help you understand why it is so valuable.

What is Home Equity?

Equity is the difference between what you owe on your mortgage and what your home is currently worth. For example, if you owe $150,000 and your home is worth $250,000, you have $100,000 of equity in your home. To determine your equity at any one time, you will need to have an accurate assessment of the value of your home. Only a real estate appraiser can give you an official evaluation of your home’s everchanging worth, but you can estimate the value based on comparable home sales in your area.

How Do You Build Home Equity?

There are numerous ways to build equity in your home.

  • Make a big down payment. The larger amount you put down in the beginning, the more equity you will start out with.
  • Focus on paying off your mortgage. Your minimum monthly mortgage payment covers interest, taxes and insurance, with some of it going towards your principal balance. Paying a little more than the minimum each month will allow you to lower your principal balance faster, growing the equity in your home.
  • Stay in your home for at least five years. If your home increases in value, you will grow your home equity. One way to do that is to stay in your home for at least five years to see its value jump.
  • Add value to your home by renovating. Updating your kitchen or bathrooms or even adding on an addition can make your home more appealing.

How Do You Use Home Equity?

You can use the equity in your home to help you financially in several ways, including as a tool to help buy a new home. The more equity you have inside your current home, the more you will profit from the sale. This allows you to make a larger down payment on the next home, lowering your mortgage on a comparable house or allowing you to purchase a more expensive one.

You can also borrow against your home with a home equity loan or home equity line of credit (HELOC). A home equity loan works like a second mortgage, allowing you to borrow a specified percentage of equity you have in your home in a lump sum you will then pay back monthly. A HELOC is more like a credit card, except the limit is tied to the equity in your home. You only have to pay back what you borrow.

How We Can Help

We can help you finance your next big project, help pay off other debt and dozens of other uses through a home equity loan or HELOC. Contact us today to learn more about our rates and be connected to a mortgage loan officer who can answer any of your questions.