I have long been an advocate of homeownership to help people achieve a sense of financial stability. One key to that financial leg up is the home’s equity. And in this market, equity is increasing at record numbers.
What is equity?
You’ve probably seen headlines talking about the equity gains homeowners have had in recent years. You may also have heard that one benefit of homeownership can be building equity.
But just what is equity and why does it matter?
Equity is the difference between what you owe on your mortgage and what your home is worth. For example:
$550,000 Home Value
➖ $300,000 Loan Balance
This matters because when you sell the home, that money is profit you can use for a down payment or other things for the new home.
You also can leverage that equity for all kinds of other goals, like
paying off high interest debit
investing in other real estate
or putting in that pool.
Renovate vs Selling/Buying
Speaking of things you can do with equity, now can be a good time to renovate certain spaces in your home given the rise in home equity the past few years. Experts agree that a new kitchen, larger bathroom in the owner’s suite or additional living space help increase the home’s value.
But what if you don’t want to use your savings or cash right now for a renovation? You could do a renovation loan. With a renovation loan you get a new mortgage that pays off your current one but also covers the cost of whatever improvements you want to make.
It’s a win-win. You get the renovations you want but also could increase your equity for when you finally do sell.
Unlock equity with a HELOC
If you own your home, have a great rate on your mortgage and the house is worth a lot more than you owe – you could be a candidate for a HELOC (home equity line of credit). This is one way to tap into the equity without giving up that great rate.
With a HELOC, you can usually borrow up to 89.9% of your home’s value minus the amount you owe.
✅ The home is worth $500,000 ✅ $449,500 (89.9% of home value)
✅ But you owe $300,000
✅ You can get $149,500 in a HELOC
HELOC’s are great to pay down higher interest loans or credit card debt. The cool thing about a line of credit is you only pay on what you borrow. And often payments can be interest only for the first 10 years or so.