Home Equity Basics

December 16, 2023
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As much as everyone dreads making those monthly mortgage payments, one way to think of them is paying into your future in the way of equity. Simply stated, your equity is the cash you can access as you accrue it. If you are looking to renovate a property or maybe even pay off some high interest credit card debt, equity can be an amazing way to get some cash into your pocket. Here are some more details about home equity, what it is and how to use it.

When talking about real estate, your equity refers to the ownership of a home. So even though you legally can own the home, you only have all of its equity once the mortgage is completely paid off. You can of course access the equity you have potentially before your loan has been paid off. See how to access it further down in this article.

How to calculate it

There are two forms of equity. The initial equity which is the amount of money you put down on the property. So if you close on your new home with 20% down, then you have 20% equity. The other kind is progressive equity. This is the amount of equity you gain in a few ways. As time goes on and real estate market conditions improve and grow, then your home should be worth more. If you do some appropriate home improvements, then the home will increase in value as well. Finally, as you continue to pay down your mortgage, you can also increase your equity as you reduce the size of your loan. So at any time you can calculate equity by taking the current market value of your home and subtracting the amount owed on the mortgage.

Ideas on ways to use it

Once you have a large amount of equity you can choose to do some things with it. You can potentially take out equity to consolidate debt that you may have on higher interest credit cards or other loans. Some people take equity out and choose to flip houses where they buy a property that needs fixing and then sell it to yield a profit. Others may decide to just buy additional properties like rental buildings and collect monthly rents for hopes of some passive income.

How to access it

So all is great if you have some equity, but how do you access it to use it? There are a few ways. The first option is you could do a home equity line of credit (HELOC). This is basically a loan in the amount of some of the equity in your home. This will really just function like a second mortgage. You get the money up front and can start paying it back monthly over a fixed period of time. Another way is a cash-out refinance. This is when you refinance your home with an entirely new mortgage and new loan rate and you can pull out some of your equity out at that time. This only makes sense if you can get a better mortgage rate than you already have or if you are looking to take out equity while also possibly doing a shorter term for your new home loan.