A great benefit of homeownership is the amount of equity you build. Home equity is a valuable asset for homeowners that can easily increase by making on-time mortgage payments. Equity is the appraised value of your home minus any outstanding loan balances. Equity builds as you pay down your mortgage loan or increase your home’s value. Homeowners can use their available equity to borrow home equity loans or lines of credit.
How do you build equity?
Equity is determined by subtracting your home’s current market value from your mortgage balance. There are a few ways to increase your home’s equity. The easiest and best way to increase the amount of equity you have is to make regular mortgage payments. When possible, making extra payments can help pay down your mortgage balance faster. Making home improvements that increase the value of your home helps increase your home’s equity. The larger the down payment you make, the faster you can access your home equity. You can also increase your equity if and when home prices rise.
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What can you do with home equity?
There are several ways that homeowners can use their home equity. When you sell your home, you’ll receive the majority of your equity at closing, which can be used as a down payment on your new home. Equity can be used as collateral for a home equity loan or home equity line of credit (HELOC) to fund a home improvement project, debt consolidation, or to make large purchases. Senior homeowners can use the equity of their paid-off home for a reverse mortgage in which the lender pays them.
A lot of people with a significant amount of equity apply it toward home renovations that will increase the home’s value. It’s also a popular way to finance the purchase of a second property. Equity can be used as a second down payment or collateral against a second mortgage. You can calculate your home equity to determine how much you can borrow. Experienced home loan specialists can help you determine your available equity and answer any questions you have about the home loan process.
Types of Home Equity Loans
There are two types of home equity loans: fixed-rate loans and revolving lines of credit. A fixed loan type offers a borrower a lump-sum payment that’s repaid over a period of time at a fixed interest rate. A home equity line of credit (HELOC) is an adjustable-rate loan that functions like a credit card. Borrowers are pre-approved for a credit limit and can access the funds using a credit card or special check.
The amount of the monthly payments varies with the current interest rate and the balance owed. The average draw period is ten years, followed by a repayment period between 10-20 years. HELOCs are popular ways for homeowners to access cash to pay off credit card balances and other debt consolidation.
Home equity is one of the greatest benefits of owning a home. The more you pay down your mortgage balance, make extra payments, and increase your home’s value, the more your equity increases.