What is home equity?
Home equity is the difference between the current market value of your home and the amount you owe on your mortgage. Essentially, it represents the portion of your home that you truly own outright. As you pay down your mortgage and/or your home grows in value, your home equity increases.
How to build home equity
Making mortgage payments: Each monthly mortgage payment you make goes towards reducing your loan balance, thereby increasing your equity.
Appreciation: As property values in your area increase over time, the market value of your home may rise, leading to an increase in your home equity.
Home improvements: Renovations or upgrades that add value to your property can boost your home's equity. Examples include kitchen remodels, bathroom upgrades, or adding a deck.
How to calculate home equity
To calculate your home equity, subtract the amount you owe on your mortgage from the current market value of your home. The formula is simple: Home Equity = Market Value of Home - Mortgage Balance.
How to use home equity
Home improvements: Use your home equity to fund renovations or repairs that can increase the value of your property.
Emergency fund: Establishing a home equity line of credit can serve as a valuable source of emergency funds for unexpected expenses.
Investment property: If you're considering investing in a new property, leveraging the equity in your current home can allow you to sidestep the need to save up for a deposit.
Debt consolidation: Consolidating high-interest debt into your home loan may lower your overall interest payments and improve cash-flow. However, this should only be done with careful consideration as you may pay more interest over the term of your mortgage.
Family guarantor support: You may be able to use you equity to guarantee a home loan for your children, so they can get into their own home without saving a deposit.
In conclusion, home equity is a valuable asset that can provide financial flexibility and opportunities for homeowners. By understanding how to build, calculate, and use home equity wisely, you can make the most of your investment in homeownership.