The Basics of Home Equity
There is a sense of personal accomplishment in owning a home. Finding the right place to call home allows you to be independent, comfortable, and of course financially free. Owning a home is considered to be a sound investment for a healthy and successful future because one of the most important aspects of being a homeowner is building equity. Peoples Security Bank is here to explain what home equity is and how you can benefit from it.
What is Home Equity?
Home equity is the current market value of the financial interest you have in your home. It’s the portion of your home that you own as opposed to the mortgage lender. With every mortgage payment you make, you’re contributing to the equity that’s available in your home. But, home equity means much more than just a mortgage that is being paid off. It is a tangible asset that gives you the ability to borrow with to achieve important goals in your life.
Understanding How Equity Works
Equity is determined by what the home’s value is and what is owed on the remaining mortgage loan balance. To calculate equity, you need to figure out an estimate of what your home is worth and then subtract the balance of the loan. For example, if you estimate your home is worth $200,000 and the loan balance that is still owed is $50,000 that means that you have equity of $150,000 in the home. Here are some ways your home’s equity can grow:
- When you purchase a home, you typically have to make a down payment on the loan. This is your first opportunity to start growing equity.
- As mortgage payments are made over time, your equity increases and the mortgage lender’s interest in your home decreases. Each payment you make reduces the outstanding loan balance you owe.
- Equity may increase over time based on your home’s value. A home’s value is affected by a number of factors such as physical condition, location, and the real estate economy.
Borrowing with Your Home’s Equity
Home equity is commonly treated as a type of collateral that homeowners can borrow with to obtain certain loans. A home equity loan provides a borrower with a lump sum loan based on a portion of the available equity in their home. Payments are fixed over the life of the loan, so that you can pay the loan off within the designated term. A home equity line of credit, on the other hand, provides a borrower with access to funds up to a credit limit based on a portion of the available equity in the home. During the draw period, you can borrow, repay, and re-borrow multiple times up to your credit limit. “Home equity loans and lines of credit are a great way to borrow with the equity you’ve built up to complete home renovations, cover education costs, and even help pay for unexpected expenses. Our goal at PSBT is to make the home loans process quick and easy to keep you moving forward,” says Peter Stumpp, Vice President, Retail Business Development Officer.
What You Can Use Your Home Equity For
- Home Improvements – You can reinvest in your home using your equity by making renovations, repairs, or new additions. By completing home improvements, you can increase your home’s equity even more.
- Education Costs – It’s possible for your equity to help pay for any education costs you may have.
- Buying a Car – As a homeowner, you are able to reinvest your equity into getting a new set of wheels.
- Unexpected Expenses – Emergencies can happen and it’s important to try and plan for them. You can use your equity to help pay for expenses that aren’t planned for to keep your financial future on track.