If you own a home and are thinking about
buying a new one, doing home renovations, or looking for cash for another goal – your kid's tuition, consolidating debt, etc. - you may be able to leverage equity in your home. In fact, building equity is one of the most significant financial benefits of home ownership.
What is Home Equity?
Home equity is the difference between the value of your home and how much you still owe on your mortgage. There are two ways equity can increase –payments on your mortgage and/or an increase in the value of your home.
For example, let's say you purchased a home for $200,000 a few years ago, which is still valued at $200,000. You paid a down payment when you bought the house and made monthly mortgage payments for several years, so you currently owe $150,000 on your mortgage. That means you have $50,000 in equity in your home ($200,000 – $150,000).
Another example, let's say you purchased that same home for $200,00 a few years ago, but the value of your home has increased to $225,000. You've paid the down payment and monthly mortgage payments and currently owe $150,000 on your home. In this scenario, you have $75,000 in equity in your home ($225,000 - $150,000).
Unfortunately, you can also lose equity in your home. Let's use the scenario above. After the down payment and monthly mortgage payments, you owe $150,000 on your home, but the home's value dropped from $200,000 to $150,000. In this scenario, you have no equity in your home despite the money you've put out.
The good news is that
home prices have increased by 4.3% annually since 1991.
What Can You Do With the Equity in Your Home?
- Buy Another Home
If you have $50,000 equity in the home you're selling, you have $50,000 that you can use for a down payment, plus any money you've saved and earmarked for a down payment. This may allow you to buy a bigger or nicer home and immediately give you more equity in your new home.
- Home Equity Line of Credit (HELOC)
"A home equity line of credit, also known as a HELOC, is a line of credit secured by your home that gives you a revolving credit line to use for large expenses or to consolidate higher-interest rate debt on other loans such as credit cards,"
Bank of America explains. "A HELOC often has a lower interest rate than some other common types of loans, and the interest may be tax deductible."
- Cash-Out Refinance
"A cash-out refinance is a mortgage refinancing option that lets you convert home equity into cash,"
Investopedia explains. "A new mortgage is taken out for more than your previous mortgage balance, and the difference is paid to you in cash."
- Home Equity Loan
"A home equity loan is a second loan that's separate from your mortgage and allows you to borrow against the equity in your home,"
Rocket Mortgage explains. "Unlike a cash-out refinance, a home equity loan doesn't replace the mortgage you currently have. Instead, it's a second mortgage with a separate payment."
How Can You Build Equity in Your Home More Quickly?
- Pay More Than the Minimum Mortgage Payment
You can make bi-weekly payments instead of monthly payments, add an extra $100 a month to your mortgage payment, or apply your tax refund (or other cash windfall) to your mortgage payment. Any of these actions will increase the equity in your home more quickly.
- Make a Big Down Payment
The bigger the down payment, the more equity you build in your home. For example, if you make a $5,000 down payment, you immediately have $5,000 in equity. If you make a $10,000 down payment, you immediately have $10,000 in equity.
- Stay in Your Home Longer
Usually, the longer you stay in your home and pay down your mortgage, the more equity you build. Furthermore, "Homes generally increase in value over time," according to
Rocket Homes. "The longer a person owns their home, the more appreciation they'll typically experience…"
- Make Improvements That Increase Your Home's Value
If you make improvements to your home, you may increase the value of your home, thereby increasing your equity. According to
Renofi, home renovations provide an average of 70% return on investment.
Ready to Use Your Home's Equity to Purchase a New Home?
Pete Heim is a lifelong Berks County resident and a leading Pennsylvania Realtor®. Pete knows Berks County real estate like nobody else, and he and his team are ready to get to work to help you find your dream home!
Give him a call today at
610-745-3378 or
610-898-1441, or
connect with him online.
