Take Advantage of Your Home Equity: A Homeowner’s 1st Guide
Owning a home has many benefits over renting, such as a stable living situation, predictable monthly payments, and the ability to make changes. Homes are more prevalent in areas with lower crime rates and higher civic involvement.
     Furthermore, research indicates that homeowners are healthier and happier than renters, and their kids perform better in school. However, one of the biggest advantages of homeownership is the potential for long-term wealth accumulation. The Urban Institute found that most families benefit financially from homeownership, and a recent study revealed that in some areas, the median net worth of homeowners can be up to 8’0 times greater than that of renters.
      So how does buying a home contribute to wealth accumulation? And what steps ought you to take to make the most of your investment? Learn how to use your home’s equity to your advantage.
WHAT IS HOME EQUITY?
Home equity is the difference between the value of your house and the mortgage balance. As an illustration, if your home is currently worth $250,000 and your mortgage balance is $200,000, you have $50,000 in home equity.
$250,000 (Market Value of the Home) – $200,000 (Mortgage Balance)
$50,000 (Home Equity) (Home Equity)
Your home’s equity is regarded as a non-liquid asset. It’s your money, but instead of remaining in a bank account, it helps you pay for housing. And when you take the possibility of appreciation into account, a real estate investment will probably yield a higher return than any current savings account.
WHAT CAN I DO TO GROW MY HOME’S EQUITY FASTER?
Now that you understand the benefits of building equity, you may wonder how you can speed up your rate of growth. There are two basic ways to increase the equity in your home:
1.Pay down your mortgage:
As your mortgage balance decreases, your home’s equity increases, as we previously mentioned. So, one way to increase the equity in your home is to pay off your mortgage.
Some home owners accomplish this by making a small extra payment each month, making an extra mortgage payment yearly, or making a lump sum payment whenever they have extra cash, such as from an annual bonus, a gift, or an inheritance.
However, make sure to confirm the details of your loan with your mortgage lender before making any additional payments. Prepayment penalties may apply to some mortgages. It’s crucial to make sure that any additional payments you make will go toward the principal of your loan.
Reducing your amortization period is another way to pay off your mortgage more quickly. For instance, you might think about refinancing from a 30-year or 25-year mortgage to a 15-year mortgage if you can afford the higher monthly payments.
You could save a ton of money on interest over the course of your loan in addition to accelerating the growth of your home equity.
2.Raise your home’s market value:
Another way to increase your home equity is to increase the property’s market value. While many factors that affect how much your property appreciates (such as demographic trends or the health of the economy) are beyond your control, there are things you can do to raise its value.
For example, many homeowners enjoy do-it-yourself projects that can add value at a relatively low cost. Others choose to invest in larger, strategic upgrades. Keep in mind, you won’t necessarily get back every dollar you invest in your home. In fact, according to Remodeling Magazine’s latest Cost vs. Value Report, the remodeling project with the highest return on investment is a garage door replacement, which costs about $3600 and is expected to recoup 97.5{fb1e1880c459e557ac3ce17ffa2de9d6b992aa91487d45f235782beb8d8c21f0} at resale. In contrast, an upscale kitchen remodel—which can cost around $130,000—averages less than a 60{fb1e1880c459e557ac3ce17ffa2de9d6b992aa91487d45f235782beb8d8c21f0} return on investment.
Of course, keeping up with routine maintenance is the most important thing you can do to protect your property’s value. Neglecting to maintain your home’s structure and systems could have a negative impact on its value—therefore reducing your home equity. So be sure to stay on top of recommended maintenance and repairs.
HOW DO I ACCESS MY HOME EQUITY IF I NEED IT?
When you put your money into a checking or savings account, it’s easy to make a withdrawal when needed. However, tapping into your home equity is a little more complicated.
The primary way homeowners access their equity is by selling their home. Many sellers will use their equity as a downpayment on a new home. Or some homeowners may choose to downsize and use the equity to supplement their income or retirement savings.
But what if you want to access the equity in your home while you’re still living in it? Maybe you want to finance a home renovation, consolidate debt, or pay for college. To do that, you will need to take out a loan using your home equity as collateral.
There are several ways to borrow against your home equity, depending on your needs and qualifications:
- Second Mortgage – A second mortgage, also known as a home equity loan, is structured similar to a primary mortgage. You borrow a lump-sum amount, which you are responsible for paying back—with interest—over a set period of time. Most second mortgages have a fixed interest rate and provide the borrower with a predictable monthly payment. Keep in mind, if you take out a home equity loan, you will be making monthly payments on both your primary and secondary mortgages, so budget accordingly.
- Cash-Out Refinance – With a cash-out refinance, you refinance your primary mortgage for a higher amount than you currently owe. Then you pay off your original mortgage and keep the difference as cash. This option may be preferable to a second mortgage if you have a high interest rate on your current mortgage or prefer to make just one payment per month.
- Home Equity Line of Credit (HELOC) – A home equity line of credit, or HELOC, is a revolving line of credit, similar to a credit card. It allows you to draw out money as you need it instead of taking out a lump sum all at once. A HELOC may come with a checkbook or debit card to enable easy access to funds. You will only need to make payments on the amount of money that has been drawn. Similar to a credit card, the interest rate on a HELOC is variable, so your payment each month could change depending on how much you borrow and how interest rates fluctuate.
- Reverse Mortgage – A reverse mortgage enables qualifying seniors to borrow against the equity in their home to supplement their retirement funds. In most cases, the loan (plus interest) doesn’t need to be repaid until the homeowners sell, move, or are deceased.
Tapping into your home equity may be a good option for some homeowners, but it’s important to do your research first. In some cases, another type of loan or financing method may offer a lower interest rate or better terms to fit your needs. And it’s important to remember that defaulting on a home equity loan could result in foreclosure. Ask us for a referral to a lender or financial adviser to find out if a home equity loan is right for you.
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