What Is Home Equity?


One of the biggest perks of buying a home is the ability to build equity. Equity is a valuable asset that can increase your net worth, plus you can tap it and access funds in the form of a loan or line of credit.

Here’s what you need to know about home equity, including ways to increase your equity and best uses for it.

What is home equity?

Home equity is the portion of your home that you own. To put it simply, it’s the difference between your home’s value and what you owe your mortgage company. So, if you owe your mortgage lender $250,000 and your property appraises for $300,000, your equity is $50,000.

What are ways to increase your equity?

Each month a portion of your mortgage payment goes toward reducing the principal balance. Your equity, in turn, increases as this balance decreases. This happens gradually, but you can build equity faster by making higher or additional mortgage payments.

Some homeowners periodically make an extra principal-only payment, or they’ll pay a little extra toward their principal every month. This chips away at the balance quicker, which increases their equity at a faster rate.

Purchasing with a down payment is another way to increase equity. For example, if you purchase a $300,000 home with a 5% down payment, you’ll have about $15,000 of equity upon closing.

You can also build equity faster with home improvements. Certain renovations and updates add value to a home. These include kitchen and bathroom remodels, appliance upgrades, landscaping, home additions, new patios and decks, and smart home technologies.

How to figure out your home equity?

To calculate your home equity, contact your lender to see how much you currently owe. You can get payoff information by signing into your online account.

Keep in mind, this is only half of the information you’ll need. You’ll also need a home appraisal. An appraiser inspects a home and takes note of its overall condition, square footage, and features. The property is then compared with similar homes in the area to assess its market value.

Once you have these numbers, subtract your payoff amount from your home’s value to determine your equity.

Best uses for home equity

Fortunately, you don’t have to sell the home to tap your equity. If you need access to funds, there’s the option of a cash-out refinance. A refinance replaces an existing mortgage with a new one.

Some people refinance and only adjust their rate and term. However, you can also “cash out” some of your equity when refinancing. In most cases, you can borrow up to 80% of your equity. Keep in mind, though, this will increase your mortgage balance.

If you don’t want to replace your existing mortgage, another option is a home equity loan or a home equity line of credit (HELOC). You can use these to borrow up to 80% of your equity too. However, a home equity loan comes in the form of a lump sum payment, whereas a HELOC provides access to a line of credit on an as-needed basis.

Regardless of how you tap your equity, you can use funds for many purposes. Good uses include debt consolidation, home improvements, college tuition, and starting a business.

Ready to put your home equity to work? To learn more about your options, contact the loan experts at FirstBank Mortgage for information on cash-out refinances, home equity loans, and HELOCs.

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Have questions? Contact us for neighborly advice.

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