The experience of becoming a homeowner is both thrilling and intimidating for many first-time home buyers.
After successfully buying your first home, you will eventually accumulate a significant asset that could be useful to you in various ways. Applying for a home equity loan is one way to pursue this.
The value of a homeowner’s financial interest in their house is known as home equity. In other words, it is the market worth of the physical property, less any debts affixed to it.
The value of your house that you own is called your home equity. It is the difference between the market value of your house and the remaining mortgage balance on the property.
Your home equity grows as you pay off your mortgage or as the value of your home rises. Consider it as a savings account that increases as you make house improvements.
In this post, we’ll explore home equity and how home buyers can leverage it to their advantage.
Why Home Equity Matters
Home equity is a long-term financial asset with several advantages, such as financial security and availability for low-cost financing—in case you need to refinance or obtain a new loan.
The biggest financial asset you typically have is the equity in your home. Your equity can be used to purchase investments, make home improvements, or even assist family members with down payments on their first homes.
Homeownership is frequently considered one of the best methods to accumulate wealth gradually. Your property becomes a long-term savings account as your home equity increases as your mortgage gets paid down. This can lead to a considerable accumulation of wealth over time.
When many reach retirement age, people with little home equity may be forced to downsize or keep working to pay off the debt. Therefore, you should strive to utilise your equity to its maximum extent while simultaneously paying off as much of your mortgage before retiring.
Substantial home equity acts as a safety net in times of monetary crisis. To pay for unexpected expenses like medical bills or house repairs, you can borrow against the equity in your home through various ways, such as home equity loans or lines of credit.
It may be an essential part of your financial plan, allowing you to accomplish several objectives and safeguard your financial future. It is vital to handle home equity carefully to minimise potential risks and financial difficulties.
How to calculate home equity?
Calculating home equity is a relatively straightforward process. Here’s how you estimate your home equity:
- Determine your property’s current market value
- Subtract the outstanding balance on your mortgage
Get an accurate estimate of the value of your property by looking at recent sales of properties similar to yours in the area before calculating your home equity. The difference will be your home equity at present. Note that this will build up as market value increases and your mortgage balance decreases.
For example, say you have a property currently worth $1,000,000 in the market, and a remaining home loan balance of $280,000. By subtracting your home loan balance from the property value, you get:
$1,000,000-$280,000 = $720,000.
In this case, some lenders will allow you to use a fraction of your home equity to secure a loan. You can only access this asset using a specialised financing solution such as an Equity Home Loan.
Speak with our senior mortgage brokers to know more.
It’s essential to remember that changes in the value of your property and your mortgage payments can cause your home equity to change over time. Your equity would increase due to your mortgage payments and home value improvements.
You may better understand your financial situation as a homeowner and make responsible decisions about how to use this asset’s leverage by routinely checking your home equity.
How can I access my home equity?
You must refinance your current mortgage to access your home equity. This includes obtaining a new mortgage larger than your previous one and using the extra cash to access your equity.
Cash-out loans and using your present home’s equity to buy another property are the two types of home equity loans that are most frequently used.
You can access your home equity through home equity loans, commonly referred to as second mortgages, which are one-time loans that let you take out a certain sum of money based on the value of your house. Usually, the loan has a fixed interest rate and set monthly payments for a specific time. Many lenders and banks offer other finance solutions and features that utilise your home equity.
A Line of Credit or LOC is a revolving line of credit that allows you to borrow money up to a predetermined credit limit as needed.
You pay interest on the amount you borrow, and depending on your loan terms, the interest rate can be fixed or variable.
Various lenders may have different limitations on how you can use it.
When you refinance with a cash out feature, your current mortgage is replaced with a new one with a higher principal balance. The difference between the old and new mortgage payments is given to you in cash.
It’s vital to thoroughly assess your financial condition, goals, and the risks involved with each strategy before taking advantage of your home equity.
Consult our senior mortgage specialists to choose the best action for your requirements and circumstances. Additionally, ensure you comprehend the conditions, costs, and payback demands of any home equity solution you are considering.
How can I grow my home equity?
Growing your home’s equity might be a wise financial move because it increases money and your sense of security. You can do so aggressively and build equity early on, or take the long road and focus more on financial stability.
You can put as much money down as possible on the house you’re buying to start building equity immediately. But this isn’t the only way to grow your equity.
Making on-time monthly mortgage payments is the most straightforward strategy to increase your home’s equity. Each payment reduces the principal amount, which raises your equity over time. Consider adding more instalments or rounding up your payments to speed up this process.
Stay put to benefit from an increase in the value of your house. You’re more likely to experience some appreciation the longer you’re in it. It increases your equity share.
Your equity can be considerably increased by improving your home’s worth through renovations, enhancements, and maintenance.
Focus on tasks that will yield a high return on investment (ROI), such as remodelling your kitchen and bathroom, making your home more energy-efficient, and improving its curb appeal.
What is a home equity loan and do I qualify?
You can borrow money with a home equity loan by using the value of your house as collateral.
Home equity loans are frequently utilised for expensive items, including substantial purchases, debt consolidation, home improvements, and education costs.
You can obtain a home equity loan by contacting a lender that provides these types of loans. A professional evaluation of your home is the first step to determining its market value.
A lender will also examine your credit and debt-to-income ratio to determine whether you have enough home equity to qualify for this loan.
If approved for a home equity loan, the money will typically be disbursed to you in one lump sum following the closing.
Remember that different lenders may have varying qualifying requirements, so it’s a good idea to look around and compare loan offers from other financial institutions to discover the best terms and prices.
How a mortgage professional can help
Home equity is a priceless asset that can provide first-time homebuyers with financial freedom and opportunity. Understanding how to leverage your home’s value is essential whether you take out a home equity loan or want to use it for future house purchases.
However, it’s critical to approach home equity with caution and a clear financial plan to get the most out of this resource without putting your home at risk.
With the lender of your choosing, we can assist you in obtaining an equity-release loan as quickly as possible.