Home Equity Basics
As much as we all dislike making those monthly mortgage payments, one way to think of them is paying towards your future in the way of home equity. Simply put, equity is the cash you can access as you accrue it. If you are looking to remodel a property or maybe even pay off some high interest credit card debt, equity can be an amazing way to get some quick cash into your pocket. Here is some more information about home equity, what it is and how you can use it.
What is home equity
When talking about real estate, equity refers to the ownership of a home. So even though you legally may own the property, you only have all of its equity once the mortgage is fully paid off. You can potentially access the equity you have before your loan has been paid off. See how you can do this further down.
How to calculate it
There are two basic forms of equity. There is initial equity which is the amount of money you put down on the home. So if you close on your new home with 20% down, then you have 20% equity then. The other type is progressive equity. This is the amount of equity you accrue in a few ways. As time goes on and home prices improve and grow, then your home should be worth more. If you do appropriate home improvements, then the home will increase in value even more. Finally, as you continue to pay down your mortgage, you can also increase your equity as you reduce your loan amount. So at any time you can calculate equity by taking the current market value of your home and subtract the amount owed on the mortgage.
How to use it
Once you have a good amount of equity you can choose to do some things with it. You can potentially take out equity to consolidate your debt that you may have on some higher interest credit cards or other loans. Some people take equity out to flip houses where they buy a property that needs fixing and then sell it for a profit. Others may choose to just buy additional properties like rental buildings or second homes and collect monthly rents for hopes of some passive income.
How to access it
So all is well if you have some equity, but how do you access it to use it? First, you could do a home equity line of credit (HELOC). This is basically a loan in the amount of some of the equity in your home and will really just act like a second mortgage. You get the money and can start paying it back monthly over a fixed period of time. Another way is a cash-out refinance where you refinance your home with an entirely new mortgage and new loan rate and therefore you can pull out some of your equity at that time. This only is a good idea if you can get a good mortgage rate or if you are looking to take out equity while also possibly doing a shorter term for your new home loan.