What Is Home Equity & How It Works

One benefit of owning a home or property is your ability to build equity and use that to fund other projects – like a home renovation, pay off debt, or even send your kid to college. But what is equity and how does it work? Let’s do a quick dive into home equity.

What is equity in a home or property? 

Equity is the value YOU own in property, like a house. It’s the difference between what’s OWED (the mortgage) and what the property is WORTH in the current market.

Equity grows if the property value goes up or the amount you own on your mortgage goes down. Your home or property equity can also fall if the market goes down faster than you’re paying off your mortgage. 

The key thing to remember is that you OWN the increases in value. Your home loan doesn’t go up (or down) if the home’s value changes.

How does home equity work? How much equity can I borrow from my home?

Here’s a simple example of how home equity works: Let’s say you have a house worth $300,000 and you owe the bank $200,000. Your equity in your home or property would be $100,000.

If in 5 years your house is valued at $500,000 and you still owe $150,000, your equity will be $350,000.

If you want to know the actual equity in your home, you need to know the current value of your home and the amount owed on your mortgage. There are lots of equity calculators you can use to get an approximate equity value or you can even look at comparable home values in your neighborhood. But if you want a real number, you’ll need an official appraisal of your home or property.

What can I do with my home equity? 

You can use equity as collateral for a loan. So if your home equity is $100,000, you could borrow against that value for up to $100,000. When you get your new loan, you can choose to use it however you want: pay off debt, complete a home renovation project, fund your retirement, or use it as a down payment for a bigger home.

But keep in mind your home equity is not a piggy bank. Home equity can become a key financial asset over time – so treat it wisely.

How do I borrow against my home or property equity?

There are 4 different ways you can borrow against your home’s equity:

    • Home equity loan: Sometimes referred to as a “second mortgage,” a home equity loan is set at a fixed rate over a fixed period with a lump sum borrowed against your home’s equity.
    • Home equity line of credit (HELOC):  A HELOC is a revolving line of credit with an adjustable rate of interest. These are a lot like credit cards where you can continuously borrow up to an approved limit while paying off the balance.
    • Fixed-rate home equity line of credit: This is when you convert a HELOC to a fixed rate and then have to pay off the fixed-rate amount over a specified period.
    • Cash-out refinance: A cash-out refinance is when you use your equity to get a new mortgage for a higher amount and then pay off the existing mortgage. Whatever money is remaining, you use it as needed.

As when you applied for a home mortgage, research your options and lenders before deciding how to borrow against your home equity. 

If you have questions, let us know. We’re happy to help direct you to the right resources.

Your Team at Liberty Title Company of America

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