Understanding Home Equity And Its Uses

You are probably already familiar with the term ‘home equity’, but there’s no need to be ashamed if you’re not entirely sure what it means or how it may relate to you and your finances.

However, if you’re looking for new ways of borrowing money or making payments – particularly as inflation rises and prices of essentials such as food and gas increase – then you may want to become well-versed in the ins and outs of home equity. In fact, once you’ve done some research and calculated your own equity, you could soon find yourself joining the ranks of the many Americans who are leveraging their home equity to their advantage to consolidate their debts or fund household refurbishments. Read on to find out more.

What Exactly Is Home Equity Anyway?

Essentially, home equity refers to the value of your financial interest in your property. In other words, the equity is the current market value of your home, minus any money you still owe on your mortgage. You first begin acquiring equity in a property when you make the initial down payment to purchase it, and, with each mortgage payment that you make, your equity continues to grow.

How To Work Out Your Equity

Calculating your home equity is quite simple. All you need to do is establish the current market value of your home, which you can do by ascertaining what sums other properties in your area have recently sold for.

You then simply subtract the remaining balance of your loan from this figure. You can find out your current loan balance from your lender. The amount you get from that simple calculation is your current equity.

Borrowing Against Your Home Equity

If you are currently struggling with debt – perhaps as a result of the rising cost of living – then you may want to consider using your home equity as collateral, to gain access to much-needed funds.

For example, if you have been wondering “Can you refinance a credit card?”, the answer is: yes, to some extent – and you can use your home equity to help you, in more ways than one. A Home Equity Loan (HEL) or a Home Equity Line Of Credit (HELOC) are both options for refinancing a credit card – or for paying for something else vital, such as tuition fees or a medical procedure, for example.

Of course, you have to be absolutely sure that you can make the required payments for this type of borrowing, as if not, there is a risk that you could lose your home. That’s why it’s important to do your research and take a long hard look at your finances before you commit to using your home equity in this manner.

Using Home Equity To Your Advantage

While there are obvious risks to borrowing against your home equity to pay off debts or to acquire funds for something you need, there are benefits too.

For example, once your equity amounts to 20%, you can cancel private mortgage insurance. In addition, you can pay your bills and other essentials using home equity, rather than a credit card, which will probably have a higher interest rate. That’s why many people may opt to pay off credit card debt using home equity – to get rid of the debt with the biggest rate of interest.

How To Boost Your Home Equity

If you’re keen to increase the equity of your home – whether for the purposes of borrowing against it, or simply to gain a greater share of your property as fast as possible – there are several things you can do.

These include: making a large down payment on your property; paying back more than the minimum payment required for your mortgage as often as you can; and making strategic improvements to the house to boost its market value.

Things To Consider

Before you commit to tapping into your home equity, there are a couple of important factors to bear in mind.

For one thing, the value of your home may alter due to unforeseen circumstances, such as flooding or fire damage. Another factor to bear in mind is the economy, as times of economic difficulty can send house prices crashing, and this could affect the value of your home.

You also need to bear in mind that there will be a limit to the amount of funds you can acquire through a home equity loan, or line of credit. In general, you may be permitted to borrow around 80% of the value of your home, but the precise amount will depend on other factors, such as your credit score, so you will have to consult with a lender to get a specific amount.

Use Your Home Equity Wisely

As you can see, there are a number of advantages to having home equity, and if you use it strategically, you can easily acquire funds for essential payments or purchases. However, lenders advise you to use your home equity with caution, as, if something goes wrong, you have quite literally put your home on the line. As such, it’s best to avoid using home equity to pay for something non-essential.