Real Estate

Understanding Home Equity and Why It Is Important

Understanding Home Equity and Why It Is Important

Home equity refers to the portion of your home loan that you’ve paid upfront, as opposed to the lenders. For many homeowners, their most precious asset is their home equity with the best thing about it being that it grows without you having to do anything other than making your monthly mortgage payment.

What Exactly Is Home Equity?

Home equity is the estimated cost of your home excluding any remaining mortgage and loan obligations. It can be used to borrow equity loans or lines of credit, making it a valuable asset for homeowners.

How to Leverage on Your Home Equity

Drawing against the value of your house could be an excellent alternative if you’re trying to free up funds for a home remodeling or settle the non-mortgage debt. You also generate equity as you make down payments on your mortgage, which you can then use for home equity loans or equity lines of credit (HELOCs).

Home equity can be a very useful tool and if you intend to take out loans from it here are some guidelines to keep in mind.

Invest in your future- invest in ventures that would improve the outlook and overall value of your property, because this is one sure way of building tour equity.

Calculate your equity- to get your equity, deduct your outstanding debt from the current market value of your house. For example, if your property is worth $250,000 but you still owe $150,000, your home’s estimated equity is $100,000.

Weigh the pros and cons- not everyone is cut out to use equity to pay for unexpected bills or consolidate debt, so consider the hazards of using your property as collateral and look into personal loan possibilities or other debt consolidation loan alternatives before applying for a home equity loan.

Confirm your eligibility- before approving a loan, lenders normally want 20% equity, a credit score in the mid-600s, and a debt-to-income ratio of less than 43%. Without a doubt, if you don’t meet this requirement then automatically you don’t qualify.

Steps to Take in Increasing Your Equity

Because home equity is the difference between the current market value of your home and the amount owed on your mortgage, it could appreciate if you follow these simple steps.

Pay your mortgage as and when due- reducing the outstanding sum on your mortgage is the simplest approach to boost your home’s equity. When you pay your monthly mortgage promptly you reduce your mortgage balance and increase your equity.
Another way is to pay additional principal payments on your mortgage to accelerate your equity growth.

Upgrade your Home Outlook

Boosting the value of your home has a lot of impact on the level of your equity, regardless of the status of your principal balance. Also take on necessary renovations, by making your findings of what is necessary for your home equity to be increased.

When the value of the property increases the natural increment of property value that occurs over time is known as appreciation. And although there is no actual prediction of the rate of appreciation growth, when it does happen, it increases your equity. Looking at historical home price data in your area may provide some insight into whether home prices have been heading upward or decreasing in that axis.

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When you put a substantial down payment on a home: A greater down payment can also help you build equity in your property. For example, if you put down 20% instead of 10% on your home, you’ll have more equity. Because of this, you may be able to access your home equity sooner.

Advantages of Home Equity

When you need a big sum of money for a home renovation project, debt consolidation, or any other reason, taking out part of your equity will do you a world of good. Here are some benefits of HELOCs and home equity loans include:

Interest rates should be lowered- the security of your home equity loan or line of credit depends on your home. The interest rates on these loans are lower than those on unsecured debt like credit cards and personal loans. If you need to reduce high-interest debt, this can save you money on interest payments and enhance your monthly cash flow.

Disadvantages

Not everyone is cut out for loan collection and so one must weigh the negative turn that could be the resultant effect.
Such as:

Borrowing is expensive: This loan is subject to a lot of surcharges as dictated by lenders, so pay attention to the annual percentage rate (APR), which covers the interest rate as well as additional loan expenses, as you compare lenders. You’ll almost certainly pay a higher interest rate if you add these costs to your loan.

There’s a chance you’ll lose your home: Because home equity debt is secured by your home, your lender has the right to foreclose if you don’t make payments and you may find that you owe more than what your house is valued at due to prices falling.

Lines of Credit Secured by your Home (HELOCs)

A HELOC, or home equity line of credit, functions similar to a credit card, in that you can withdraw as much as the credit limit would permit.

Also, you could opt for an interest-only or interest-plus-principal payments plan. The majority of HELOCs have variable rates, which means your monthly payment will fluctuate throughout the loan. Whereas fixed-rate HELOCs are available from some lenders, though they usually come with higher beginning interest rates and a charge.

In conclusion, home equity is an excellent financial instrument taken out to pay for large expenses such as home remodeling, and high-interest debt consolidation. So if there is an emergency that you need the urgent loan for, you can request a sum that equals your total equity.

The Author

Ajisebutu Doyinsola

Doyinsola Ajisebutu is a journalist and prolific writer who takes a special interest in Finance, Insurance, and the Tech world.