What is home equity?
Home equity is the value of one’s house in the current market, however it doesn’t include liens attached to the property. In simpler terms, home equity is determined by how much a home’s value is worth minus how much of the mortgage and other liens that have already been paid off. The amount of equity in a home can fluctuate over time when payments are being made and the housing market changes the impact of the property’s current value. Buyers can leverage their home equity in the form of collateral to tap into cash in the form of a home equity loan or a home equity line of credit. When a down payment of twenty percent or more is put down, home equity is automatically added to the home.
How to build it
With monthly mortgage payments, that will decrease the amount owed and will in turn increase the home equity. Home equity is the principle owed on the loan subtracted from the value of the home. Appreciation is also another way to build up equity; the value of the property is unlikely to remain the same as when it was purchased. The property value will most likely either go up or down, but on average will have an appreciation of 3% per year. It’s important to note that the market can fluctuate and rise and fall due to economic conditions, upkeep of the home, or value of the neighborhood homes.
How to borrow against it
Homeowners with home equity can leverage it as collateral to secure funds for their financial needs. Home equity loans allow for the homeowner to borrow a sum against the current home equity for a fixed rate over a period of time. Home Equity line of credit, or HELOC, allows for the homeowner to essentially have a second mortgage and borrow money against the equity that is in the home and receive it as a line of credit. The borrower will then pay the fixed amount over a specific period of time. A reverse mortgage is another way to borrow against the home’s equity for those over 62 years old; the appraisal of the homeowner’s house will determine how much can be borrowed.
How to use it
Homeowners can use the home equity to cancel private mortgage insurance once the equity reaches twenty percent. It should be cancelled automatically once the equity reaches twenty-two percent, but it can be requested to be cancelled once the equity reaches twenty percent. It can also be used to pay off expenses such as credit card balances or loans to avoid other higher-cost debts.
If homeowners are seeking money to manage their financial needs, home equity can help secure money needed to pay off expenses. Funds obtained through a home equity loan, home equity line of credit, and a cash-out refinance may be tax free because they’re borrowed money, not income. Home equity can be very beneficial when borrowing money against it.