What is Home Equity? And How You Can Use It!

Home equity is a great asset to have. It is computed as the difference between the home’s market value and the sum the homeowner still owes. A large home equity is built over time as the homeowner is able to pay mortgage. It is largest when the homeowner is totally debt-free.

Understanding Home Equity

With the above said, home equity is the percentage of the property that the homeowner truly owns. It is the value of the property asset that the homeowner can use because any mortgage left unpaid is ‘owned’ by the lender.

Say you bought a $500,000 home and placed a $100,000 down payment on it with the remaining $400,000 in mortgage. This means that you ‘truly’ own 20% of your home’s value at this point. As you pay your mortgage, the percentage that you ‘truly’ own increases, more so when property values go up.

Does  this mean that the lender owns 80% of your home in the beginning? It would look like that but technically you own your home all along only that the house is your collateral for the loan that you take to buy it.

What does the lender gain in this set-up? Well, you pay for interest rate. The lender may also end up owning your home if you fail to pay according to terms set up and agreed by both your parties.

How to Build Home Equity

You can build equity by paying off your loan and improving your property so that it gets a higher market value.

Your equity will increase as you pay off the balance in your loan. You have to ensure that you’re paying more than just the interest and that you’re paying towards the principal. This way, you build equity over time.

Your equity will also increase during surges in the real estate market or when you take on home improvement projects that has a positive effect on home value.

How to Use Home Equity

Like any other asset, you can tap your home equity when in need. You can do this by getting a home equity loan or a HELOC. You can also use the equity you’ve built when you sell your current home to buy another one that’s better suited to your needs.

Another possibility is to use your home equity to fund your retirement by getting a reverse mortgage. This will allow you to use your home equity like a savings fund. You get to stay in your home and not have to sell it to enjoy the equity.

The most popular ways to use home equity is by applying for a HELOC or applying for a lump-sum home equity loan. Both have pros and cons and are good solutions for needing a large sum of accessible cash. What’s best for you will depend on several factors such as how much cash you need, your ability to pay, and for what purpose you’re taking the home equity loan for.

Do you want to use your home equity but still unsure whether you want to apply for a HELOC or apply for a second mortgage? Speak with our professional mortgage brokers so they can help you determine which one would be a better way of using your home equity for you! Contact us today!

What You Need to Know About Getting a Home Equity Loan

With the steadily rising home prices at present (more so in key cities), it isn’t far fetched that you’re probably sitting on a huge equity especially if you’ve been paying your mortgage for about 10 years or more. Tapping into your home equity by using a home equity loan can give you a huge advantage in paying off high-interest debts and affording some expenses without having to sell your home.

Do you know that approximately 10 million homeowners will take a home equity loan between 2018 to 2022 as predicted by a TransUnion study? That’s double the numbers from 2013 to 2017! What better time than now to understand how equity loans work and find out what you need to know in order to get one?

Know Your Credit Score

Your credit score is a key factor in determining whether your loan will be approved or not, so finding out your credit score is a must more so if you want to really plan out your options just in case a line of credit or a home equity loan may not come into fruitition.

Find Out How Much Debt Do You Have

The current debt that you have may become a hindrance to your securing a loan. Although a lot of people get a home equity loan for debt consolidation, wanting to do the same may not sit well with some lenders. Lenders lend you money so that they can get interest in return. They know they won’t be getting any if your existing debts are eating up 43% of your income or more.

Determine Your Equity

Your equity will let you know about how much you can tap by getting a home equity loan or a line of credit. Do this after the initial steps above. To simplify, you need to have an estimate of your home’s current value and subtract how much you still owe from that. Reduce the answer to 80% of your numbers and that will be the maximum a lender is probably going to lend you. Plan around that accordingly to avoid surprises and determine if the effort of filing and fees will be worth it.

Why Are You Getting A Loan?

Assess why you are getting a loan and what you can do besides applying for a home equity loan. Find out what are the types of home equity loans and determine which will fit your needs and goals better. Do you need a huge lump sum payable in the next 5 to 15 years? Then a home equity loan is the right option for you. If what you need is extra funds for repeated expenses, a line of credit can help ease your financial burden for about 10 years.

Want to talk with Canadian mortgage experts about ways to use your home equity in the future? Talk to us and we’d be happy to walk you through the various details of applying for a home equity loan as well as the benefits of home equity loans.