If you own a home, you may be wondering about how home equity affects you. Understanding exactly what equity is will help you to use it to your advantage.
What Is Home Equity?
The equity in your home is related to the balance of your mortgage and the value of your home. Any value over the amount you owe is considered to be equity. This amount generally goes up over time. However, a drop in real estate prices can cause equity to go down temporarily. The long-term trend is for equity to go up as the balance of a mortgage is reduced and the value of a home increases.
Using Home Equity
Many homeowners choose to let the equity in their home go untouched, but there are financing options available based on the equity found in your home. Imagine that you own a home that is valued at $600,000. If you only owe $400,000 on your mortgage, the equity that you have in your home is $200,000.
This equity can be used as collateral on a loan. A home equity loan allows you to borrow a lump sum or open a line of credit. If you are borrowing with a project in mind, you may want to opt for the lump sum home equity loan to ensure that you are only borrowing as much as you need.
If you are borrowing for costs that will come up over time, you may want to open a home equity line of credit. A common situation that warrants something like this is paying university fees for your kids. Tuition costs and fees are paid on an annual basis, so parents may want to open a line of credit to pay for these fees as they are due.
Investing With Equity
Another way to use home equity is to take out a loan that can be used to purchase an investment property. A general rule when purchasing investment properties with the funds received through a home equity loan is to look at properties that are a maximum of four times the cost of the amount of equity in your home.
For example, imagine that you have $200,000 in equity. If you are purchasing an investment property for $800,000, you can put down a 20% deposit ($160'000) and use the remaining $40,000 for legal fees, stamp duty and other fees associated with the purchase.
Home equity gives you the opportunity to tap into the value in your home. You can use the money that is freed up through a home equity loan to pay for renovations, college costs or a property investment.
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