If you’re a homeowner, then you’ve probably heard of home equity before — at least in some form or fashion.
Whether your neighbor recently did a cash-out refinance or you’ve been told you can “take money out of your house” for renovations or expenses, it all comes down to home equity — and how much of it you have.
Want help de-mystifying this often confusing homeownership term? Want to know what you can do with the home equity you’ve built up in your property? Let’s dive in.
What Is Equity in a Home?
Put simply, home equity is your stake in the home — the portion you own and will get back when it comes time to sell the property.
What is 20 Percent Equity in a Home
Let’s say you put a 20% down payment on your home. For the time being, you have a 20% stake in your property — or 20% equity. As you pay down your loan balance, your stake in the property and your equity grow. The longer you’re in the home and the more mortgage payments you’ve made, the higher your equity will be.
Until you’ve fully paid off your mortgage loan, your lender will always have some fraction of equity in your property.
What Can You Use Your Home Equity For?
You can use home equity to your financial advantage in quite a few ways. First, you can borrow against it. This can mean taking out a home equity loan or using a cash-out refinance.
1. Home equity loans
Home equity loans are essentially a second mortgage. Just like your current loan, they allow you to borrow money — up to a certain share of your equity in the home — at a set interest rate over a period of a few years.
2. Cash-out refinance
Cash-out refinances, however, replace your current loan. You get an entirely new mortgage loan but get to keep a portion of your equity stake in cash. In either case, you can use the cash back toward renovations, medical bills, college tuition, or any other expenses you must cover.
3. Home Equity Line of Credit
Finally, there are also home equity lines of credit in which a lender extends a line of credit for a set number of years. You have the flexibility to borrow up to your credit limit for the first period of the loan — usually about 10 years.
However, home equity lines of credit can lead to bad spending habits and even more debt for many homeowners. They’re also not offered by every lender, including Embrace.
How Much Is Your Home Equity Worth?
The worth of your home equity directly ties to your home’s value. For example, if an appraiser deems your home is worth $400,000, and you have 30% equity in the property, then your equity is worth $120,000 (30% of $400,000).
This is the total amount you’d have to pull from if you chose a cash-out refinance or another sort of equity-based transaction.
What Does Building Equity Mean?
How do you build up equity in a home? You can build up more equity and thus gain access to more cash in many ways. The best way is to make extra mortgage payments on your principal occasionally. This will reduce the principal balance on your loan and give you a higher stake in the property.
You can also make value-adding renovations and upgrades on the home. If these increase your home’s value significantly, it will also increase equity in your home.
General price appreciation will help your case, too. If your local housing market is booming, your neighborhood expands or gets new amenities, or buyer demand is up, your home’s value rises in step. That equals more equity and access to more cash.
Something to Think About Before Using Your Equity
If you’re considering a home equity loan or other equity product, make sure you know what’s at stake. On these loans, your home is the collateral — meaning if you can’t repay that loan, your home can be foreclosed on (even if it’s not your first mortgage).
Always ask for a full estimate of costs for any home equity product you’re considering. Make sure you know your monthly payment and other financial obligations, and look at your budget to ensure you can comfortably cover those expenses before putting your house on the line.
Want to Tap Into Your Equity?
Are you considering tapping into your home equity to fund home improvement projects or pay your child’s college tuition?
Just want to know how much equity you have access to? Then speak to a loan officer at Embrace Home Loans today.
