Home Equity – What Is It and What Can You Do With It?
The majority of homeowners do not own their homes per se. They do not have the amount of capital required to buy their homes in cash and they, therefore, seek mortgages from certified lenders. They are co-owners with the lenders for as long as the mortgage is outstanding and not paid-in-full.
Home equity is the difference between the value of the property and the amount still owed to the lender. This surplus, which is home equity, belongs solely to the homeowner. By example, if a potential homeowner borrowed $400,000 for their house and they have so far paid off $ 200,000; their home equity could be as high as $200,000.
How to Build Home Equity:
Home equity is primarily gained by making regular payments against the mortgage. The owner of the home borrows however much they need to buy the house but puts down a percentage as agreed upon with the lender. They then proceed to make monthly payments towards the mortgage. The payments offset the principal amount as well as the interest. The more consistent the homeowner is with their payments, the faster they can pay off the mortgage and build equity.
Other ways that homeowners can build equity include:
- Appreciating home values – If the homeowner’s market goes up in value, their homes will automatically be affected positively. Higher market values mean more equity.
- Extra payments – As much as the mortgage could be payable in 30 years, it does not hurt to pay more when the homeowner can. Paying more than the minimum monthly requirement reduces the amount owed and builds equity faster for the homeowner.
- Home improvements – If a homeowner is keen on updating their home, they could cause its value to go up. Replacing an old roof, replacing the fading siding, renovating the kitchen, or improving the landscaping could give the home a facelift and boost its market value. In making these improvements, the homeowner should go for those that provide them with a favorable return on interest.
What Determines Home Equity?
It is strictly determined by the value of the home. If a homeowner buys a house for $400,000 then the value of the house shoots to $420,000, their equity will automatically rise by the said $20,000. If on the other hand, it goes down by the same amount due to the various factors, the homeowner loses equity. Equity, negative or positive, has nothing to do with the initial cost of the house, which would most probably be the amount of the mortgage.
Home equity is how much your home is worth minus what you still owe on it. Keep in mind; this is not just how much you paid for it. Home equity is based on what your home would be bought for in the current market in its current condition. Depending on the terms of your loan and the housing market in your area, this can sometimes work against you.
How Can a Homeowner Use their Equity?
Home equity is money on paper and only becomes real when the homeowner sells their home and pays back the lender. People can, however, use it to open a line of credit or even take out a home equity loan. If the homeowner sold the house, they could use the extra amount to finance their next purchase, which would mean they would not need to borrow much. An even wiser idea would be to use the equity to build up an investment portfolio that could generate income for the homeowner.
Head over Tails – When Mortgages Outweigh Home Equity:
Have you ever heard of anyone ending up “upside down” on their home loan? This is when a homeowner owes more on a house than its appraised value on the open market. If a homeowner in this situation sells the house, they would still have to pay the bank the remainder of what they owe.
This is obviously a very bad situation to be in, and if you find yourself in a similar situation you should contact Advantage CCS for housing counseling in Pennsylvania. We can help educate you and help you understand all of your options. Here’s a link to our Housing Counseling services: https://www.advantageccs.org/services/housing-counseling
Borrowing against Time – Reverse Mortgages:
Home equity also plays an important role in reverse mortgages. These are a type of loan marketed to seniors under the premise that they will get to continue living in their home and they won’t have to make monthly loan payments either. The caveat is that the amount that has to be paid back grows and grows until the house is sold, the borrower moves out of the home for a year or more, or the borrower passes away.
These loans can help seniors deal with costs they may face, but they can also be abused. Pennsylvania housing counseling can help you sort out what is the best path for your finances and your home.
Consumer Credit Counseling and Home Equity:
Utilizing housing counseling can help you avoid situations which can end in foreclosure and can help you have more money in the long run. Managing home equity can be tough, but there are people who can help you if you find that you cannot manage your current housing payment. If you use the equity in your house make sure you use it wisely, like to pay down credit card debt.