Here's What You Need to Know About Home Equity and The Best Ways to Use It

One of the biggest advantages of homeownership is building equity over time. But what really is home equity? Read on to learn what it is, how it works, and the smartest ways you can use it to your advantage.

What is Home Equity?

Home equity is the amount of your home that you own. Basically, it is the market value of your property minus any liens or debts linked to it. Paying off your mortgage can help you gain home equity. Simply put, home equity is an owner's greatest asset.

According to the recent Homeowner Equity Insights Report by CoreLogic, U.S. homeowners with mortgages (roughly 63% of all properties) have seen their equity increase by a total of nearly $590 billion since the first quarter of 2019, an increase of 6.5%, year over year. This means that in the first quarter of 2020, the average homeowner gained approximately $9,600 in equity during the past year. 

Homeowners hit the jackpot this past quarter despite the coronavirus pandemic. Prices kept rising and borrowers had a ton of equity come March - quite an achievement for those looking to sell in 2020.

3 Ways You Can Leverage Homeowner's Equity:

1. Home equity loan - If you have built up equity in your home, a second mortgage might be the way to go. It works much like a regular loan but is based on how much of your original mortgage balance has been paid down – so it's worth considering if that amount meets what you need!

2. Home equity line of credit (HELOC) - With a HELOC, you can get the flexibility that other loan types don't offer. It's like having two loans rolled into one - during the draw period, you pay off what you need and when your repayment comes around it'll be split up over multiple payments!

3. Cash-out refinance - In this kind of refinance, you borrow more than what you owe and receive the difference in funds, which can be used as you see fit.

4 Smart Ways to Use the Equity of Your Home

If you've built up equity in your home over the years, there are several ways to use that asset to your advantage:

1. Make home renovations and upgrades.

One of the most common uses of home equity is to invest in home improvements, especially those upgrades that will increase the value of your home and build more equity as a result. Renovation projects such as upgrading a kitchen or bathroom, adding more livable space, or updating appliances, can make your home more comfortable and elevate its condition so it will be more attractive to potential buyers. These renovations are a good return on investment since your home will sell quicker and for more money.

Just remember that there are some home improvement projects that can actually lower your home's value so be careful before you borrow against your equity with this purpose in mind.

2. Create an emergency fund.

It may be time to start looking into the equity locked away in your property. Tap into it and benefit from a low-interest loan compared to other methods like credit cards or payday loans - perfect for those times when your emergency fund runs dry!

Experts suggest that by setting up a HELOC before you need it, you’ll be able to access your money faster and be able to qualify for one once an emergency arises.

3. Buy a second home or an investment property.

If you've been a homeowner for some time, chances are good that your house has seen an increase in value by now - giving you access to potential money if done right. You can take out equity from the home and put it into another property investment which could bring income down the line. But remember, investing in real estate is never 100% safe so be sure to think carefully before making any big decisions!

4. Pay off student loans and other high-interest debts.

Home equity can be a great way to give your finances an overhaul. Not only is it useful for renovations and extra property, but you can also use that hard-earned cash to pay off hefty credit cards or student loans - even refinancing available specifically for students! By merging debt with your mortgage into better rates, this could be the answer to financial freedom.

If you're feeling weighed down by high credit card balances, a debt consolidation loan may offer some much-needed relief. By taking advantage of your equity and lower rates, it can help save you money over the life of the balance - not to mention improve your overall financial health as long as you make sure that no new debt is accumulating while paying off what's there!

Bottom Line

Borrowing against the equity in your home can be a great way to access funds for some of life's expensive necessities, but it also comes with risks. Your house serves as collateral and if you don't meet loan requirements or use borrowed money unwisely, like buying a car or taking an extravagant vacation instead of making necessary repairs around the house—you could find yourself without anything left to show for it.

So before tapping into this valuable resource, think through your financial needs carefully; know that no matter which option you pick there are factors at play such as credit score and personal finances that will come into consideration.

Our team of local real estate agents can explain further your choices to ensure you’ll end up making good decisions. Give us a call today, and we’re ready to discuss all your questions.