Home Equity and How it Works

What is Equity?

Man looking out window with coffee in hand

Equity is the difference between your mortgage balance and home’s current worth. For example, if you purchase a home and put 10% down, then you have 10% equity in the home from the start. An example with numbers: Say the amount owed on a mortgage is $100,000 and the home is currently worth $200,000. In this case, there’s $100,000 in home equity.

How to Build Equity in My Home

Buying a home is an investment. That’s one of the major perks of homeownership. As with any investment, the idea – and goal – is to build wealth over time. The concept is similar with a home purchase because you’re building equity over the life of the loan. Equity built over time is yours to do what you will – don’t worry, we’ll dive deeper into what this means. Hint: More equity equates to more financial freedom.

It’s important to note that equity can increase or decrease over time. While the goal is to increase equity over time, a decrease in home equity is possible, and typically is attributed to a decrease in the value of the home.

Large Down Payment

One of the most common ways to increase equity is to put more money down towards the home purchase. After all, a down payment is an upfront payment towards owning the home outright. If a home costs $100,000, the down payment is $10,000, and the loan amount is $90,000, before any payments are made towards the loan, the equity is already $10,000.

Make Payments on Time

The good thing about building home equity is you don’t have to do anything extra (if you don’t want to) to build it – it’s growing with each monthly mortgage payment you make. With very mortgage payment you make, the principal balance decreases (not to be confused with the interest portion of the payment).

Pro Tip: To build home equity faster, make larger payments towards the principal when you can!

Home Improvements

Remodeling and updating your home, whether it’s a kitchen, bathroom, pool, energy-efficient upgrades, and so on, can add value to your home. Remember, a higher home value can increase your equity.

How to Use Home Equity

HELOC

According to Credit Karma, a Home Equity Line of Credit (HELOC) “works somewhat like a credit card. You can borrow money up to a certain credit limit set by the lender and then pay back the borrowed amounts along with interest. This option can offer more flexibility — you can even withdraw and make payments on a daily or weekly basis, if necessary.” Homeowners often opt for a HELOC to pay for major expenses including home remodels or costly repairs.

Cash-Out Refinance

With a cash-out refinance, you essentially “cash in” your equity for cash out (and in your pocket!). This type of financing solution replaces an existing mortgage with a loan amount that’s more than the current mortgage loan. You receive the difference between the two loans (i.e., home equity) in cash. A lump sum of cash can be used in any way you see fit.

Consolidate Debt

With extra cash, you can pay off debt, whether it’s auto loans, credit card debt, or student loans. As you pay down debt, typically, higher interest debt, you may see a boost in your credit score.

Take a Vacation

We get it. Everyone deserves a time to decompress, relax, and unplug from work. A vacation sounds nice, but that leisure is not always budget friendly. That’s where home equity comes into play. Yes, you can use your home’s equity to pay for a vacation! After all, it’s the money you’ve invested into your home, and you can use it to treat yourself if you so desire.

Use Your Home’s Equity

When it comes to home equity, the biggest takeaway is that building it can give you financial strength, security and leverage. Whatever you choose to do, whether it’s letting it grow over time, cashing it out, or borrowing against it, know that it can provide you with options to live the life you want!


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