What does home equity mean and why is it important? Read on to find out how to increase the equity in your home and why it’s beneficial to do so.
When you finance a home, among the many items of information you’ll receive is an amortization schedule. It shows how each monthly payment is applied to the debt that you owe on your home. If you have a 30-year mortgage balance, for example, the amortization schedule will show 360 payments, with your earlier payments primarily applied to the interest you owe on your home loan. The remainder of each payment is applied to the principal.
As those principal payments accrue, they’re added to the down payment that was applied to your purchase. Each month, the interest payment is reduced and the principal payment grows. As the proportion of your ownership increases, you grow ever closer to the payoff date for your home.
The amount that represents your ownership stake in your home at any given time is called home equity.
What does it mean when you have equity in your home?
Having equity in your home means that you own a portion or all of your home outright. It is calculated by subtracting the loan balance on your home from its appraised value. With every house payment, you are building equity that you have in your property.
Is it possible to have no equity in your home?
If you purchased your home with a no money down financing option, like a VA or USDA loan or some zero-down conventional loan options, you may start out with no equity in your home. Over time, however, the principal portion of your monthly mortgage payment will allow you to begin to accrue equity as long as your home’s property value remains stable or increases.
What does it mean to be “upside-down” in your home or mortgage?
You may have heard of someone being “upside-down” in their mortgage balance. That means that they have negative equity in their home and, in fact, owe more to the mortgage lender than their home is currently worth. This can happen in the case of an economic or real estate market downturn, where the home rapidly loses value, or in the case of a loss of home value due to damage or deferred maintenance.
Does interest count toward my home equity?
Interest is the amount of your monthly payment that you’re paying to the bank or lending institution in exchange for allowing you to borrow money to purchase your home. Interest does not count toward your home’s equity.
Should you choose to refinance your home at a lower interest rate, however, you could put more of your money toward principal and pay less to the bank for the use of their money. That would increase the amount of money that you’d have to apply toward your principal, building an equity stake in the home.
What is a good amount of equity in a house?
Of course, we would all like to have 100% equity in a home because that would mean that the home was owned completely free and clear. However, there is no set amount of equity you need to have in your home.
If you think that you’ll be moving away in a few years, you’ll want to have enough equity to ensure that you can sell your home for enough money to purchase your next home, move, and get settled in your new market. If you’re planning to stay put for many years, there’s no real need to worry about your home equity unless you plan to put some of it to work.
What are the benefits of equity in a home?
There are many great ways to take advantage of the usable equity you have in your home. You can tap into it through a cash-out refinance of your mortgage, a home equity loan, or a home equity line of credit (HELOC).
If you are a homeowner wondering, ‘What is a home equity loan,’ or ways in which you can put your home equity to work, some options for tapping into your equity include:
- Purchasing a second home: If you’ve been thinking about a vacation home or a second home to share with your family, you can tap into your home equity for down payment funds or in order to buy it outright for cash.
- Purchasing an investment property: If you’ve been thinking about how to buy a second home, the equity in your home can provide you with cash funds or a down payment to help you get started in building your portfolio.
- Paying for college tuition: If you have children going off to college or grad school and not enough set aside in their college funds, you can supplement by tapping into your home equity to help pay for tuition.
- Downsizing by paying cash: If you’ve been thinking of downsizing, either by moving to a more affordable market or by moving into a physically smaller home, you may use your home equity loans to pay cash for your new home once you sell your current home.
- Paying for a once-in-a-lifetime opportunity: Have you been planning to take a second honeymoon? Want to pay for your child’s wedding? Ready to go back to school or start a new business? Home equity loans may help you to take advantage of an exceptional opportunity or pay for something you’ve always dreamed of.
- Paying for major home improvement: Even if you take great care of your home, you may find yourself facing major repairs to the foundation, roof, or systems. A loan secured by your home’s equity may allow you to take care of the repairs you need without laying out all of your available cash funds.
You’ll find a variety of uses for your home equity, but it’s vital that you keep in mind your long-term financial goals. If you are nearing retirement, for example, you might not want to pull equity out of your home, especially if you expect your income to be reduced in your retirement years. In addition, if you’re thinking of buying a second home or an investment property, be sure to talk with your tax advisor about the implications of your purchase.
How can you increase the equity in your home?
You know that paying more toward your home’s principal can increase your home’s equity. However, there are other ways for your home’s equity to increase, even if you don’t make additional payments.These include:
- Market adjustments: Perhaps new retail or commercial development has caused property value in your market to increase. Those increases will add to your home’s value, creating instant equity.
Home improvements: Whether you bought a fixer-upper or researched the latest value-added home upgrades, you can increase your home’s value – and your equity holding – by home improvement to your space. Read our posts about how to increase property value and the best ways to increase home value on a budget for more information.
- Economic changes: Over time, prices tend to increase – and so does the value of the property. If you maintain your home in good condition and the neighborhood remains desirable, you’ll probably see an increase in your home’s value and your personal equity.
Whether you’re a buyer looking for a first-time home buyer real estate agent or a seller looking to increase your home’s equity prior to sale, Dwellful has the real estate professional you need. Find a buyer’s agent or seller’s agent with Dwellful’s agent finder. We can connect you with an agent in your market with specialized knowledge and insight to answer your questions and help you make the right decisions.