What Is Home Equity and How Can You Use It?
Equity is a commonly used term in the real estate market. Whether you’re a first-time buyer or planning to move, you’ve probably heard it used once or twice. While home equity can be a confusing concept to understand, once you do, it can help you in a number of ways. Here are the basics of home equity and how you can use it.
What Is Home Equity?
Home equity is the difference between how much you owe in mortgage payments and the value of your home. For example, if you owe $100,000 on your mortgage loan and your home’s value is $150,000, then your current home equity is $50,000.
Home equity will increase as you pay your mortgage and the value of your home increases. It can also decrease if the value of your home drops faster than the rate at which you pay your mortgage.
How Can You Use Home Equity?
Home equity can be used to pay for anything from home renovations to college tuition to large purchases. Equity can be tapped into with a couple of options. One is by applying for a home equity line of credit (or HELOC). This type of loan is usually issued for a percentage of the amount of existing equity you have in your home. Essentially, the higher your home equity, the bigger the loan will be.
The second way is to do a “cash out refinance” loan. The benefit of this type of loan is that you will only have one payment to make and if prevailing interest rates are lower than your original mortgage loan, it would be wise to take advantage of this for your full balance, therefore lowering your overall monthly payment.
When you decide to sell your home, you can profit from your home equity if you sell your home for more than it is worth. While you may not receive the full amount of home equity due to closing costs and commissions, this sum could be large enough to make a down payment on a newer, larger home.
How to Build Home Equity
Increasing your home equity is achievable if you:
- Make a Large Down Payment – A big down payment can lead to a reduced mortgage and increased equity in your new home.
- Pay Off Your Mortgage – Paying your mortgage on time and in amounts greater than the minimum due will help you to build home equity and pay off the principal balance of your mortgage faster.
- Renovate Your Home – Home renovations add desirable curb appeal to homes and, thereby, increase property value.
A Mortgage Expert You Can Trust
Butler Mortgage has been serving Osceola and Orange counties since 1994, and we also assist customers throughout the state of Florida. We’ve worked with first-time and seasoned homeowners for more than 25 years and are committed to finding a mortgage that suits your needs.
Let us help you find the right loan solution for you by calling 407-931-3800 or by filling out our free consultation form online.