It’s often said that homeownership is a good investment and builds wealth.
But why is that? It’s because of the equity you have in your home.
Home equity is the market value of your home, minus what you owe on any mortgage loans. It’s essentially the part of your home that you actually “own.”
Typically, a house will be your biggest purchase in life. That means your home is probably your most valuable asset.
Why is home equity a good thing?
Equity is an asset, so it’s part of your overall net worth.
Growing wealth through home equity is almost like a “forced” savings account. For the most part, your money is tied up in your home. But unlike other purchases that often decrease in value – a car or boat, for example – home prices often rise over time.
Increasing home equity is an ideal component of your diversified wealth strategy.
But while the concept sounds simple – build wealth by paying off your mortgage – home equity can be more complicated than that.
How to figure out your home equity
The first thing you need to do is figure out what your personal home equity is.
Start with your home’s current value and subtract the amount owed on any mortgages or other liens.
For example, if you purchase a home for $200,000 and put 20% down, your loan would be for $160,000, leaving your home equity at $40,000.
How can I build home equity?
Growing the equity in your home is a great way to build personal wealth. But aside from paying your minimum monthly mortgage payments, how can you accelerate that growth even faster?
Increases in your home equity come from:
- an increase in your property’s value
- reducing the principal balance on your mortgage loan
- making accelerated payments to your loan. Most homeowners typically make 12 mortgage payments per year. You might consider adding an extra payment within the year or adding extra money to each of your payments, which will more quickly reduce the principal you owe on your loan.
(Before you start making extra loan payments, check with your mortgage lender to see if there are any restrictions.)
Can I use my home equity if needed?
One thing to know about building home equity is that you can have access to your money if you want or need it - with a Home Equity Line of Credit (HELOC). A HELOC will give you a lump sum borrowed against the equity in your home.
Let’s use the example above about calculating your home equity:
If you’d like to get a HELOC and you qualify for a 90% Loan to Value (LTV), you would be able to borrow up to $180,000 if your home is worth $200,000 and you can borrow up to 90% of that value.
That value minus your current mortgage of $160,000 would give you a potential HELOC amount of $20,000.
Of course, accessing your money adds back on to your mortgage loan, so it reduces your overall net worth. But a HELOC can give peace of mind that your money tied up in your home can be used if needed.
Questions about home equity or HELOCs? Call me or any one of our INB mortgage lenders.