Home equity is a resource you can borrow against to pay off debt or make investments that help your money grow.
Are You HELOC-Ready?
If you’re thinking about using a home equity line of credit to access the equity in your home, check your credit score first. While you can qualify with a credit score of 620, you may pay double the interest compared to a score of 740 or higher.
Your home is more than the place you live. It’s also an important way to build wealth. We show you how to assess, improve, and use your home equity to build a stronger financial future.
If you own a home, building home equity — the value of your home minus what you owe on your mortgage — is an important long-term strategy for building wealth. That’s because home equity is a resource you can borrow against to pay off debt or make investments that help your money grow. With this in mind, you may be wondering how much equity you have in your home, how you can access it, and how you can use it to build your financial future.
What Is Your Equity?
Equity is the difference between what you owe on your mortgage (the principal) and what your home is currently worth. The simple math equation looks like this:
Current Value of Your Home – Principal Balance of Mortgage Loan = Equity
If your home is worth $250,000 and you owe $150,000 on your mortgage, you have $100,000 in equity.
Because homes generally increase in value over time, the more that you pay down your mortgage, the greater the equity. Over time, there are many ways that you can take advantage of the equity in your home.
- Equity is considered an asset and counts toward your total net worth.
- When you sell your home, your equity allows you to make a profit.
- Equity can be cashed out in a loan refinance or borrowed against as collateral. You can use the available funds to pay down debt, renovate, or buy a second home or income property.
Smart Ways to Build Home Equity
Every time that you make your regular mortgage payment, you’re building equity. However, if you want to accelerate the process, you can take these steps.
- Pay Down Your Principal
If your budget allows, try paying a little extra each month and earmark that payment to go toward your principal. Options include making an extra lump-sum payment per year, switching to biweekly payments, or rounding up your payment.
- Own Your Home Five Years or More
While the real estate market can fluctuate from year to year, the longer you stay in your home, the more you will see an increase in value. Also, when you first start paying your mortgage, you’ll be paying more toward the interest than the principal. The longer you stay in your home and make your mortgage payments, the more principal you’ll pay off and the more equity you’ll build.
You can help boost your home’s value by keeping your home in good repair and making strategic improvements. While the kinds of renovations that add value vary from area to area, most real estate agents agree that improving curb appeal, opening up floor plans, and making cosmetic improvements to kitchens and bathrooms provide the greatest return on investment.
How to Use Your Home Equity
Once you’ve built up equity, how can you use it? You could simply sell your home for a profit, or you can use one of these methods to draw on the equity while staying where you are.
A home equity loan works like a second mortgage. For example, if you have $50,000 in equity, you might qualify for a home equity loan of $35,000. Borrowers typically receive the funds in a single lump-sum payment and can use them for a variety of purposes. The loan is then repaid in monthly installments with interest, similar to a traditional mortgage.
A HELOC works similar to a credit card, with your credit limit based on the equity in your home. As you repay the outstanding balance, the lender restores your available credit. You also have the flexibility to draw as much or as little as you need during the draw period. You can use a HELOC to finance home renovations or take advantage of the low interest rate to consolidate and pay off high-interest credit card debt.
In a cash-out refinance, you refinance your mortgage for an amount that is equal to more than your current mortgage balance. The “cash out” amount goes to you in a lump sum payment and is yours to use as you see fit. You then repay the refinanced total in monthly payments with interest, like you do for your original mortgage.
- Reverse Mortgage
Reverse mortgages are increasingly popular with those 62 And older. A reverse mortgage allows you to borrow against the value of your home. That borrowed amount can come to you as a one-time payment or a series of regular payments. Homeowners often use those funds to pay for medical expenses, home repairs, or to supplement income. However, when the home is sold or no longer used as your primary residence, you or your heirs must repay the loan, fees and interest.
Before considering any strategy involving your home equity, talk to your financial advisor or one of our mortgage professionals to understand each approach’s benefits and challenges.
