What Is Home Equity?
Building equity is a huge perk to homeownership. The more you pay down your mortgage, and the more your home increases in value, the more you build equity that can benefit you in many ways.
Here’s a closer look at home equity and how you can use it.
Defining Home Equity
Equity is the difference between the value of your property and how much you owe on it. Think of equity as how much of your home that you own.
Your equity will reliably increase as you make payments on your mortgage. It also can grow along with your home’s market value.
How To Use Home Equity
Here are some ways you can use home equity to your advantage:
- Get rid of private mortgage insurance. If you have a conventional loan, you can stop paying for PMI once you have more than 20% equity.
- Cash-out refinance. If qualified, you could borrow your equity by taking out a new mortgage for more money than you currently owe on your home. The leftover cash can be used to pay for major expenses, and you would repay the loan as part of your new mortgage.
- Home equity loan. A home equity loan is a second mortgage that you repay alongside your original mortgage. You receive the loan as a lump sum, typically with a fixed interest rate and its own loan term.
- Home equity line of credit. A HELOC is similar to a home equity loan, except it works like a line of credit that you can draw from as needed and usually has an adjustable interest rate.
- Profit when you sell your home. The more equity you have in your home, the more you keep after paying off your remaining mortgage balance when you sell.
Calculating Home Equity
To calculate your home equity, find out how much you owe on your home. Include your mortgage balance and any second mortgages, home equity loans, and HELOCs.
Next, figure out what your home is worth. This can be tricky because home values are always changing. You can get a rough estimate from recent sales of similar homes in your area, or you can order a professional appraisal.
Then subtract what you owe from your home’s value. If you estimate your home is worth $300,000, and you owe $200,000 on it, that gives you about $100,000 in equity.
Home Equity FAQ
Here are the answers to some frequently asked questions about home equity.
There are a number of situations where using your home equity makes sense. You can borrow your equity as cash to make home improvements that increase the value of your home, or to pay college tuition, or to consolidate high-interest debts. Just remember that when you take out equity, you increase the amount you owe on your home.
A home equity loan adds to your monthly overhead and overall debt. If you can’t keep up with both mortgage payments, you risk default and foreclosure.
If you want to access your equity without refinancing, consider a home equity loan or HELOC.