What is Home Equity?

Homeownership is a cornerstone of the American Dream for a reason. It provides both tangible and intangible advantages. You may not be aware of the financial benefits of owning a home. But, more importantly, owning a home provides you with the benefit of increasing your home’s equity.

You might be wondering what “equity” means. That is an excellent question. Below, we’ll go over the specifics and their significance to help you better understand equity and its benefits.

The current market or appraised value of your home minus the amount you owe on your mortgage is your home’s equity. Although a real estate appraiser can provide an official valuation of your home, you can get a rough estimate by comparing the value of your home to recent home sales in your area. You can increase your equity in a variety of ways, regardless of how much it is now.

Home Equity

Tips For Increasing Your Equity

The easiest way to increase your home equity is to keep it rather than sell it. While markets fluctuate, home values in general tend to rise rather than fall over time. Your home equity will likely rise if you pay your mortgage on time and do not add to your debt. As a result, if you want to see your equity grow, we recommend staying in your home for at least five years.

Maintaining the quality of your home on a regular basis will help you build equity over time. If you find yourself in a situation where you need to sell your home quickly, it should be market-ready when the time comes to put it on the market. Fixing your floors instead of accepting a flooring allowance, for example, may provide you with more equity in the long run. Real estate agents have a keen eye for which renovations or repairs would add the most value if handled early on.

Taking a more proactive approach to home improvement will result in a high return on investment and increase the value of your home year after year. Replacing or repairing appliances, improving the exterior of your home, refinishing a cellar, or upgrading other features such as lighting and flooring will all increase the market value and equity of your home.

Is it Possible to Lose Your Equity?

If the value of your home drops faster than the rate at which you're paying down your mortgage, your equity will diminish. It's also possible to lose equity if your neighborhood's property values fall. Allowing your home to fall into disrepair is another way to lose equity. If your home needs extensive repairs, the longer you wait, the lower your property value will be, and your equity will suffer as a result.

Before your house falls into disrepair for too long, consider a cash-out refinance or a second mortgage to get the money you need to make the repairs.

Getting Your Money Back

The equity of one's home accounts for a considerable portion of most people's net worth. And you can use that equity in a variety of ways to improve your financial situation. Home equity lending, home equity lines of credit (HELOCs), and cash-out refinances are all options for extracting equity from your home. If you decide to take out a home equity loan, for example, the money can be used for anything from paying for college to a high-return-on-investment home renovation project. The amount of equity you can withdraw from your home depends on your lender, but most allow you to borrow 80 to 85 percent of its appraised value.

Apart from the satisfaction of being able to say you own your own home, equity is the long-term objective of homeownership. When it comes time to sell or make a major renovation, the more equity you have, the more financially flexible you will be. It takes time and patience, but the more payments you make and the more money you put into your home, the more equity you'll build.