Home Equity: the Secret to More Cash and Better Loans for Homeowners

What Is the Value of Home Equity

If you own a home now, then you’re sitting on a massive cash reserve. The latest CNBC report revealed that homeowners today have amassed considerable home equity. This year’s third quarter alone, equity is already at almost $10 trillion. Each mortgage borrower can tap into over $175,000.

If you’re a new homebuyer, though, the term “equity” might be confusing to you. What does it mean, and how does it affect your mortgage decisions from here on out? This article provides you with the essential answer.

What Is Home Equity?

Home equity is the market value of your house minus the total amount you owe on your mortgage. For example, if your home is worth $300,000, and you still have a balance of $200,000 on your mortgage, then your home equity would be $100,000.

How do you acquire home equity? As you successfully pay your mortgage loans over the years, the balance on your home loan gets lower and lower. The difference between what you owe and what your property is worth becomes part of your equity as well.

Many factors, though, can affect the overall equity value, which can go up or down:

  • Housing Demand: One of the foremost reasons for the significant increase of home equity in the United States is housing demand. Over the past years, especially during the pandemic, Americans have been shopping for a home. But because the supply is low and the demand is high, home prices and market values soared.
  • Economic Slowdown or Recovery: During the Great Recession, about a quarter of houses were underwater, which means these properties had negative equity. The value of their property was much lower than their debt balance. If they decided to sell the home, they would have to make up for the difference.
  • Mortgage Rates: The Fed’s decision to keep the interest rates low has helped homeowners build their equity. When mortgage rates are low, homeowners can afford a bigger loan. This is because the monthly payments will be lower, and more of the payment goes toward the principal amount owed on the house instead of the interest.
  • Condition of the House: The condition of your house can also add or subtract from the total equity. If you have a home with recent updates, such as a new roof, windows, and siding, then it will be worth more.

How You Can Use Equity to Your Advantage

Why does home equity matter to property owners? They can use it as leverage for the following:

  • Refinance: When mortgage rates are low, homeowners will probably take advantage of it through refinancing. They can use their equity as additional collateral for a new loan with better terms. Currently, mortgage rates have increased, which means refinance loans are more expensive today than a few weeks ago. Those who want to take advantage of a more favorable loan should then consider refinancing now before rates continue to climb.
  • Cash-Out Refinancing: You can also use your equity for cash-out refinancing. This means that you get to keep the extra money. For example, let’s say you have $40,000 in equity in your home, and you are looking to borrow an additional amount equal to it. You will then receive a total of $80,000 to spend on whatever you want. In this case, you would be taking out a new mortgage for $140,000 and using your home equity as collateral.
  • Home Equity Loans: Home equity loans are another popular way to use your equity. These loans are in the form of a lump sum, and you will have a fixed interest rate and repayment term. The loan is paid off in regular installments, just like your mortgage.
  • Home Equity Line of Credit (HELOC): Another option is to get a home equity line of credit. This is a loan that lets you borrow up to 80% of your home’s equity, and the interest rates are usually lower than credit cards. You only pay interest on the amount you borrow, which can be a great way to consolidate your high-interest debt.
  • Home Improvement: You can also use your home equity to fund home improvements. This will add value to your house and increase your equity.
  • Down Payment for Another Property: Lastly, you can use your home equity as a down payment for another property. If the market value of your current home has gone up, then this could be a great time to start looking for a second home or rental property.

Overall, home equity is a valuable asset that homeowners can use in various ways. For this reason, property owners need to understand how it works and how they can benefit from it.

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