Home equity is the portion of your home’s value that you own outright or the portion that you would receive if you sold your home today. Many homeowners strive to grow their home equity to build wealth or use it as a financial resource in the future.
What is Home Equity?
Home equity is the portion of your home’s value that is owned by you. In other words, it’s the market value of your home minus any outstanding mortgage or loan balance. For example, if your house is worth $600,000 and you have a $450,000 mortgage, then your equity is $150,000.
Home equity can fluctuate up or down depending on changes in the housing market. When the value of your home goes up, so does your home equity. Likewise, if the value of your house goes down, so does your home equity.
Equity can be used as collateral for a loan or line of credit. It can also be used to make home improvements, pay down debt, or finance other major expenses.
The amount of equity you have can also affect your ability to qualify for a mortgage or refinance an existing one. Therefore, it’s important to understand what home equity is and how it can impact your finances.
How Can You Grow Your Home Equity?
Most people understand that their home is an investment. Not only does it provide a place to live, but it also has the potential to appreciate in value over time. As a result, many homeowners are always looking for ways to grow their home’s equity.
One of the most common ways to do this is by making improvements to the property. By adding new features or increasing the curb appeal, you can make your home more valuable and attractive to potential buyers.
Another way to grow your home’s equity is by paying down your mortgage. As you reduce your principal balance, you’ll increase the percentage of your home that you own outright. This can be a great way to build equity while also saving money on interest payments.
Finally, keeping up with regular maintenance can also help to maintain or even increase your home’s value. By taking care of small repairs and managing wear and tear, you can ensure that your home continues to be a valuable asset.
The Benefits of Having a High Equity
Home equity is the difference between what your home could sell for on the open market and any outstanding mortgage or other claims against the property. High home equity gives you more options and opportunities should you ever need to tap into the value of your home.
For example, you could use a home equity loan to finance a major home improvement project, make repairs after a natural disaster, or cover the costs of tuition or medical bills.
You could also use a home equity line of credit (HELOC) to access funds as needed, making it a useful tool for covering unexpected expenses. And because home equity loans and lines of credit typically offer lower interest rates than other types of loans, they can end up saving you money in the long run.
If you’re fortunate enough to have built up significant equity in your home, there are ways to take advantage of it.
The Risks of Having Low Equity
Low home equity can put your family at financial risk. If you have low equity, it means you owe more on your house than it’s currently worth. This puts you at risk of foreclosure if you can’t make your mortgage payments. And, if you have to sell your house, you may not have enough equity to cover the costs of selling.
Low home equity can also make it difficult to get a home equity loan or line of credit. So, if you need cash for an emergency expense, you may be out of luck. In addition, low home equity can negatively impact your credit score. This can make it more difficult and expensive to borrow money for major purchases, such as a car or a new roof. So, if you’re thinking about taking out a loan, you may want to consider increasing your equity first.
How to Use Your Home’s Equity Wisely
Get expert advice. When it comes to using your equity, it’s always best to get professional advice from a financial advisor or tax expert. They can help you weigh the pros and cons of different options and make sure you’re making the best decision for your unique situation.
Here are a few tips for using your home equity wisely:
1. Use it for improvements that will increase your home’s value. If you’re planning to sell in the near future, it makes sense to use your equity to make improvements that will boost your home’s value. For example, upgrading your kitchen or bathroom, adding an outdoor deck or patio, or finishing a basement can all help to increase your home’s resale value.
2. Use it to pay off high-interest debt. If you have high-interest debt, such as credit card debt or a car loan, using your home equity can help you save money on interest payments. By consolidating your debt into a single loan with a lower interest rate, you’ll be able to pay off your debt more quickly and efficiently.
3. Use it for major expenses. There are certain major expenses—such as education costs or medical bills—that can be difficult to afford without help. If you have the opportunity to use equity to pay for these expenses, it can be a wise decision. Not only will you avoid going into debt, but you’ll also be able to take advantage of the tax deduction for interest payments on a mortgage loan.
4. Invest in other property. If you’re looking for an investment property, using your home equity can be a great way to finance the purchase. Keep in mind, though, that investment properties come with their own set of risks—so do your research before making any decisions.
If you’re curious about your home’s equity, visit The DeSelms Team’s website. Our experienced real estate professionals will help you estimate your home’s value and give you advice on growing your equity. Contact us today to get started!