Home equity is a term people mention when talking about a house or loan. It is also frequently mentioned when talking about selling a house or seeing a home through an investment lens, but what is it really? This article will help you understand the concept of home equity better—how it works, how you can build it, and how you can use it as a homeowner.
Home Equity: A Definition
Home equity is the part of the property that a person truly owns.
Let’s say that you borrowed money to purchase your house. Although you owe the lender some money, you are still considered the owner of the property. Your lender will charge you an interest rate in the typical loan process until you fully pay off the loan. During the entire timeline of payment, your home equity also grows.
If you subtract the amount you own from your house’s total current value, the result is your home equity value. It is considered a valuable asset that they can later in other financial transactions.
If you have not yet fully paid your loan, here is how you compute your home equity value:
Formula: Divide your loan balance by your house’s current market value, and then subtract the result from 1. Convert the answer to a percentage, and that is your equity stake.
For example, you own a property that is worth $200,000. You only managed to pay a 20% down payment of $40,000. That means you still owe $160,000, but you officially own the $40,000.
Now, you borrowed the remaining amount from a lender, and your lender obtains their interest by putting a lien on your property. If your house value doubles and becomes $400,000 later, that means you would have a 60% equity stake even if you still owe $160,000 from your lender.
How to Build Your Home Equity
The more you grow your home equity, the more assets you have under your name. Here are the simple steps you can do to increase your equity value:
- Pay your loan: The longer you have your loan, the more principal (or the payment that goes to your equity) you pay. If you keep on paying your loan, you will get to build momentum and increase your principal payments effortlessly.
- Conduct home improvement projects: The better your home value, the bigger your home equity becomes. If you do renovations in your home to improve it, you will be building your equity in the process.
What Is Home Equity For
If you wonder why you need to build your home equity, the answer is simple: your equity is part of your net worth. You can withdraw it if you want or pass it on to your family in the future. You can use it to buy and move into a new home. You can convert it to cash and use it as a long-term investment, or you can save it for your retirement. You are free to use the product of your investment in whatever way you prefer.
Home equity is a concept with which every homeowner should be familiar. Learning about it, growing it, and using it the right way can help homeowners achieve financial stability. You can use it as a long-term strategy for building wealth or as a quick source of funds during emergencies. It is also proof that paying for your own house can benefit you later. If you are interested in acquiring a home equity loan, Good Neighbors Credit Union can help you. We are dedicated to helping provide people in our community with the resources and tools they need to better manage their finances. Contact us today to apply for a loan.