The What, Why And How’s Of Home Equity

Owning a house can help build wealth. Everyone knows that homes are expensive, and most houses increase in value over time. If you want a long-term investment, then real estate is one of your go-to options.

Homeowners have the option to reside on their homes, lease it, sell it or even use it as collateral for a home loan. But of course, there’s a catch when signing up your home for a mortgage – you need to have enough home equity to cash out.

What Is Home Equity?

Your home equity refers to the percentage you own in your home minus any liens you may have on the property. For example, you bought the house with the help of a mortgage. As you pay your lender back, you get to build equity over time. In other words, home equity is the current market value of your house minus any percentage of your home you owe.

Good Read: How do I calculate how much home equity I have?

Why Does Home Equity Matters?

Home Equity is wealth waiting for you to use it. As your equity grows, so does your money. However, you can only “cash out” by tapping on your home equity. Consider it as a “forced savings account.” You need to build enough equity before you can “tap” on it, cash it out and use the funds on how you wish to spend it.

How To Tap On Your Home Equity?

Homeowners can choose between the two options wherein you have your home as collateral. Home Equity Loan is a type of Second Mortgage wherein you get to receive a lump sum of cash. Most 2nd Mortgage Texas have fixed-rates.

Home Equity Lines Of Credits or many call these as HELOCs for short, works like a credit card. You get to withdraw a certain amount whenever you the funds.

Every lender will have different requirements when it comes to credit scores, DTI ratio, and LTV ratio, but you’ll need to have enough home equity to qualify for a HELOC or Home Equity Loan.

What Are The Common Ways Homeowners Use Their Home Equity?

Home Equity matters since you can use this to fund many personal endeavors. The following five common reasons many homeowners choose to tap on their equity.

  • Home Improvement Projects.
  • Debt Consolidation.
  • Fund Investment Properties.
  • Fund Business Ventures.
  • Emergency Expenses.

Recommended Read: 5 reasons to spend your home equity (with caution)

How To Build Home Equity?

Building home equity takes time. However, you can do it faster with the following tips.

  • Start with a big down payment. When buying a house with the help of a mortgage, it would be best to put down at least 20% of the property’s value. The bigger the down payment, that would be your instant home equity which means it’s better than paying the minimum down payment.
  • Take a 15-year home loan or refinance it. You get to save on interest and own more of your house by taking a shorter home loan or refinancing it into a 15-year mortgage.
  • Invest in improving your home. By engaging on home improvement projects that can boost your home value, you also get to increase your home equity.
  • Wait it out. Most real estate properties increase in value over time. You can choose to wait it out, and your home’s equity will naturally increase after a few years.