What Is Home Equity?
Updated: Jun 9
Homeowners on average have a higher net worth than renters. This is because a home can increase in value over time. Investors often use this to their advantage to flip homes for a profit. Every homeowner has an asset that not only increases in value but has access to for a line of credit. Home equity refers to the value of the property minus any loans on the property. Every mortgage payment reduces what you owe.This creates a positive equity balance. If the loan is more than the value of the property it is referred to as negative equity or underwater mortgage. Here is an indepth guide on home equity and how it can improve your life.
How does Home equity work?
Say you took out a $340,000 loan for your house 15 years ago . You paid the mortgage down payment which is 20% and the monthly mortgage payments. So over the past 15 years you have successfully paid off the $272,000 due. During this time you added $150,000 to your home’s equity over 15 years . Your home equity would be $490,000 since your mortgage has been paid off. This is how much money you can draw upon as your home equity.Your home builds wealth as a long term asset. It may take 10-20 years .Home equity is not always guaranteed. Changes in your city’s job market or even if there is a starbucks near your home can affect your home value. Typically homes that maintain its infrastructure and home systems grow in value. To determine your equity ,you’ll need to know the value of your home. A licensed real estate appraiser can give an official valuation of what your home is worth in today’s market.
Growing Home Equity
There are 2 main ways to build home equity. Loan Repayment and Asset Appreciation. As you pay down your loan balance, your equity increases. A large downpayment will allow more equity to be available to you.You may have to focus on paying the mortgage since it goes towards paying off the principal balance of the loan. Over time, the amount that goes toward principal repayment increases. This grows with the amount of equity available. There are many ways to improve your home’s value. A home warranty plan helps increase your home’s value. This gives buyers a peace a mind and allows repair or replacement of vital home systems and appliances. You can actively work to increase your home's value through improvement projects. When the real estate market is booming, then house prices rise and you'll build equity without any effort on your part. This is often seen in large metropolitan areas however this can happen anywhere in the country.
Using Home Equity
There are main uses for home equity. Equity is an important financial tool and one of the greatest financial benefits of owning a home. You can borrow against equity, buy your next home,pay for college tuition, fund your retirement accounts. A really common use of home equity is to make repairs or improvements. That allows you to do an expensive home remodeling project to your house and pay it off over several years with almost no interest because you're basically lending yourself the money. This is in the form of Home Equity Line Of Credit or Refinancing. Home Equity Line of Credit or HELOCS are credit lines tied to your home's equity. Much like credit cards you only pay back what you borrow. These types of loans typically have lower interest rates compared to credit cards.There is tax deductions that can be made for those who use HELOCs to improve their home.The 2017 Tax Cuts and Jobs Act allows homeowners to deduct the mortgage interest on home equity loans or lines of credit if the money is used for home improvement. Refinancing is receiving extra money against what you owe on your mortgage. For example you owe $140,000 left on your mortgage and then you refinance for $190,000. Use the extra $50,000 in cash. You will repay the $190,000 in monthly payments.
Call 877-660-1621 to sign up today for one of Global Home Protection’s comprehensive home warranty plans