What Is Home Equity?
Not sure what home equity is?
Home equity is the difference between your home’s appraised value and the size of your outstanding mortgage, or in other words, the current market value of the part of the property which you truly own.
Equity can increase over time but it can also diminish in certain circumstances.
Investing in home maintenance, renovations and property additions, but also a rise in the real estate market, can all contribute to boosting your property’s equity.
On the other hand, a fall in home prices, taking additional loans or a series of missed payments can lead to a dropping in the value of your equity holding.
Why Does Home Equity Matter
Investing in the right property at the right time can be a smart move for your future.
Equity is an undeniable financial instrument which can yield results faster than other savings methods.
Hey, it can even help you build wealth.
How, you might wonder?
One of the biggest advantages of owning a home is the chance to build equity over time. Having good equity can get you a home equity loan or a home equity line of credit. You could use these loans for consolidating debt, buying another home, making home renovations and much more.
When you bought your property most probably you made a down payment and borrowed the rest of the money. With each monthly payment you make, your loan balance decreases and your equity increases.
In the end, after completing the final payment, your equity will equal your home’s value at that moment.
Tapping Into Your Home’s Equity
When looking for ways to tap into your home equity, there’s a number of options to consider – refinancing, getting a home equity loan or applying for a home equity line of credit (HELOC).
If your plan is to work with an “A lender”, meaning banks and credit unions, you should know that you are unlikely to qualify with them unless you own more than 20% equity.
And that’s not all.
Banks have many other strict requirements for approving your mortgage. They will thoroughly scrutinize your credit activity and score, the adjusted gross income on your tax return, your employment history or the debt-to-income ratio.
That’s a lot to qualify for and many times, you won’t.
The solution comes in the form of private mortgage lenders. These lenders work even with homeowners which traditional sources of capital tend to pass on.
Private mortgage lenders don’t have the same strict regulations and red tape that banks do and their interest focuses on the potential of a property, leaving the borrower’s credit score or personal wealth aside.
They are also able to close your application faster and without needing so much paperwork as banks, which is key when you’re looking for fast cash or you are in a hurry to close a new real-estate deal.
As you could see from this post, tapping into the equity of your home can be a smart move.
There are a few things you should be mindful about though!
Home equity takes some time to build and results won’t appear overnight. Just be patient and whenever possible, get advice from professionals. The real estate world can be tricky and risky but also incredibly rewarding.