Many of our new home buyers in Raleigh Durham as well as some of our existing clients ask us about home equity. What is it? How do I build it? Can I use it for buying a new home? And more. Most of our younger generations consider cryptocurrencies as more solid wealth generators than home equity, but investing in housing is one of the most stable investments, definitely more stable than the latest coin. It is surprising how poor most people's understanding is of home equity when it is one of the most reliable ways to build wealth. We are going to give you a quick course on how to build wealth using home equity and how you can use existing home equity to your financial advantage.
What is Home Equity?
What is equity? Home equity is the percentage of your home that you own through paying your mortgage. Equity is the amount of money split between parties if an asset is liquidated, so home equity is the amount you have based on a percentage of the overall value of the property. To calculate home equity, take the current market value of your home and subtract it from what you still owe on your mortgage. If your home is valued at $350,000 and you put down a 15% down payment, you have $52,500 home equity because you actually only own 15%.
There are two important contributing factors to help you understand how wealth is built with home equity. Time: Very simply; the longer you're in your home making your monthly mortgage payments the larger percentage you own of your home and the greater your "equity".
Market Value: If your home is worth more money, and homes are worth more money if their value goes up, you have gained additional home equity.
Another way people build up their home equity is by refinancing if mortgage rates drop by 1% or more. Refinancing when rates have dropped allows you to significantly lower your monthly payment. Savvy homeowners then continue to pay the same amount as they were paying prior to refinancing and this "overpayment" is applied directly to the principal, which serves two purposes. The first is your home's equity increases with each and every payment. The second is the time it will take to pay off your mortgage is cut significantly and the overall interest you pay on the loan is cut. Home buying is one of the largest financial transactions most people make, and is often one of your largest, most valuable assets. If you pay attention to mortgage rates and the market value of your home and are strategic about your finances, a refinance at the right time, allows you to invest either more into your home building equity or into income-generating real estate which is another way to generate wealth out of equity.
Generating Home Equity
There are two ways to build home equity. First, pay down your loan so you own more of your home. Remember that most mortgages are amortizing loans where payments go towards interest and the principal and as noted above the more you pay on the principal; the greater your home equity.
The second way is unrelated to your repayment, it is through an increase in home value. In most cases in today's market homes have increased in price because of how constricted the inventory is and the demand for home buying is sky-high because of low mortgage rates. Another way a home increases in value is to make improvements to the home that make it more desirable in your market. Any way you look at this, being a homeowner and improving your home pays off and is an investment in your future, even if it is not liquid.
How can you use Home Equity?
Bringing us to our next point, if home equity is not liquid, how can I use it now and how can I use it to build wealth? Once you have built up 20% or more, you can access home equity by borrowing against it such as taking out a home equity loan. You can borrow a lump sum with a home equity loan, borrow gradually with a home equity line of credit or refinance your existing mortgage for one in a larger amount, and you get the difference in cash. We rarely recommend reverse mortgages, (though this is an option) and we have a blog about that here, but refinancing at the correct time, or selling at the correct time can build significant wealth.
Is there a "better" time to use Home Equity?
Due to home shortages, construction slow downs, home value, and equity are way up. According to Core Logic, homeowners are seeing an increase of up to $51,000 in home equity. If have ever thought about moving in the last five years, it's definitely worth discussing with us. You will get more home for your money and even if the perfect home is not available, it is possible to do a post occupancy agreement that gives you time to look for another home. Remember, when you decide to move, you can take the extra equity toward a new home. You might still have to take out a mortgage but you have incredibly low rates right now, hovering around 3% and you use your equity toward a larger down payment. Alternatively, if you are downsizing you can get cash if your new purchase is less than your current property.
If you are looking to be more liquid, a refinance is a good option to pay down credit cards and make home improvements. Building assets in terms of real estate and equity is an incredibly solid investment, especially in The Triangle. If you are interested in building assets in home equity over building an invisible coin collection, contact My NC Homes today!
Posted by Larry Tollen on