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One of the many benefits of purchasing a home, is that you can build equity and use that equity to pay for major kitchen remodeling projects, repay high-interest credit cards debt , or even cover college tuition.
What is equity and how can you make use of it? This is a brief guide on how home equity works, and why it's so important.
What is Home Equity?
Equity is the difference between your mortgage owing and your current home value. You have $50,000 equity in your home if you owe $150,000 on a mortgage loan and your home has a value of $200,000
There are two ways your equity can grow. Your equity will increase as you pay down your mortgage. If your home's value rises, your equity will also grow.
If your equity drops faster than your principal balance, your equity could also fall.
What is Home Equity?
Here's an example showing how equity can change over the course of time.
Imagine you are buying a house for $200,000. A down payment of 10% could be required if you buy a house for $200,000. This would amount to $20,000. The lender will then give you a $180,000 mortgage loan.
If you have a home that is worth $200,000, then you will have $20,000 equity. That's $200,000 less $180,000.
Jump ahead two years. If you've been paying your mortgage on time, it could be that you now owe $170,000. Perhaps your home's worth has increased to $210,000 during this period.
Now you have $40,000 equity or $210,000 less $170,000.
You could also be hurt by your home's worth. Let's say you have paid off your mortgage loan by $170,000 but your home's actual value is $195,000. You now have $25,000 equity or $195,000 less $170,000.
You will need to know the home's value in order to determine your equity.
Only a professional can provide an official appraisal of the value of your home in today's market. However, you can estimate the value of your home by looking at similar home sales in your local area, or checking with online real-estate sales that offer home value estimates.
These estimates may not always be accurate. They are meant to give an idea of the current value of your home.
How to Build Home Equity
There are many ways to build equity in your home.
Get a Big Down Payment
A large downpayment is the fastest way to build equity. Your equity in your home will increase the larger your down payment.
Let's say you purchase your home for $180,000. You'll owe $175,000 if you pay $5,000 down on your mortgage. This leaves you with $5,000 equity. For a $180,000 home, you would owe $160,000 if you put down $20,000. This $20,000 equity is much more impressive than $5,000.
Knowing how much money you have available to pay down your mortgage is an important step in building equity in your home. Preapproval for a mortgage is a great way to understand the amount of your savings that you will need to pay toward your downpayment.
Concentrate on paying off your mortgage
A portion of every mortgage payment that you make will be used to pay the principal amount of your home loan. The remr principal balance will be paid when you first begin making mortgage payments. More will go ainder will go towards interest, property taxes or homeowners' insurance.
A smaller amount of youtowards your interest. However, the good news is that your principal balance will decrease and your equity will grow the longer your mortgage term.
However, it is important to know that not all loans work in this manner.
You won't lose your principal balance or increase equity if you take out an interest only or non-amortizing loan. Your payments will go towards paying your interest, property taxes, and insurance. You will eventually have to pay a lump sum in order to pay your principal balance.
You can pay more than the minimum
You can pay more each month if you are looking to increase your equity faster. You can make an additional payment every year either on your own, or through biweekly payments or even $100 more per month to help reduce your loan principal balance and increase homeowners' home equity.
You can stay in your home for 5 years or more
If your home is valued, you will build equity. Although no home will see its value increase, it is possible to increase your chances of seeing your home appreciate in value if you remain in your home for longer periods.
If you want to increase your equity, plan to stay in your home for at least 5 years.
Remodel and add curb appeal
You can increase the value of your home by adding an additional bedroom, renovating an old kitchen, or adding a master bath. You can also improve the curb appeal of your home by investing in landscaping.
How to Use Your Home Equity
Equity is a valuable financial tool. It is one of the greatest financial advantages of owning a house.
This equity can be used to buy a bigger, more expensive home or consolidate other debts. This equity can be used to make major home improvement, consolidate other debt and plan for retirement. Joslin Rhodes
Use Equity to Buy a New Home
Maybe you have lived in your house for 7 or 8 years. Perhaps your family is growing. Maybe your job takes you to a different city. No matter what reason, you are ready to move to a new location.
Equity can be your friend when you make this move.
Let's assume that the home you are selling is worth $220,000 and that you have $70,000 in equity. You will make a profit if you sell your home for its actual value. Due to fees such as the commission paid by your agent and closing costs for mortgage, you won't receive $70,000 of equity. However, you will still be able to use the solid profit for a large downpayment on your next house.
You may be able get into a bigger, more expensive house by paying a large down payment. Your mortgage will be less. Your monthly payment will also be lower if you have a smaller mortgage.
Your monthly mortgage payment may be lower if your down payment was large enough.
Use Equity to Your Retirement
A reverse mortgage 1 might be an option for you if you are over 62 and looking to retire. A reverse mortgage will allow you to stop paying your monthly mortgage payment and instead, receive money based upon the equity in your house.
The amount you can borrow will depend on your age, how much equity your home has, and current interest rates.
You have the option to choose whether you want your proceeds in one lump sum or monthly payments. You can also choose to receive your proceeds in one lump sum, regular monthly payments or a line of credit.
If you sell your house, move out for 6 months or more in a year, your loan will not be repaid. You can use the proceeds from the sale of your property to repay the loan if you sell your property.
Your heirs have many options if you die. You have the option to either sell your home and keep any proceeds, refinance into a regular mortgage forward or leave the lender to sell it. Reverse mortgages are non-recourse loans, which means that your heirs will not be required to repay more than they can make from the sale.
Rocket Mortgage (r), does not offer reverse mortgages at the moment.
Borrowing against your Home Equity is an option
You can borrow against the equity of your home in three ways: a loan on your home, a line of credit on your home or a cash-out refinance.
Because equity money has lower interest rates, it is a smart way of borrowing money. Instead of using equity, you could use personal loans and credit cards to pay the interest.
Home equity lending can be dangerous. Your lender may take your home via foreclosure if you don't make your payments on schedule. This is not possible if you have a personal loan, or if you make purchases using your credit card.
A cash out refinance allows you to refinance for more money than you owe on your mortgage. This cash is yours to use as you wish.
Let's say you owe $180,000 on a mortgage. Refinance your mortgage for $220,000, and you can then get the $40,000 cash. The $220,000 monthly payment will be repaid, along with interest. The equity of your home will determine how much you can add to your cash-out refinance.
A cash-out refinance will allow you to borrow against your equity, rather than your credit. This type of financing can provide you with greater access to funds at lower interest rates than other forms. After completing your cash out refinance you will need to have at least 20% equity. Make sure you have enough equity for your goals.
You'll still have one mortgage after you refinance.
A cash-out refinance loan is essentially a replacement for your original mortgage. However, a home Equity loan works as a second mortgage.
Let's say you have $50,000 equity. A home equity loan up to $40,000. You may be eligible. Your lender will loan $40,000 to you in one payment after the loan closes. This money can be used however you like.
This loan is paid back monthly with interest while you continue to make your regular mortgage payments.
Rocket Mortgage does not offer home equity loans.
Home Equity Line Of Credit
A home equity line is also known as a . It is similar to a credit card in that the credit limit is linked to your equity.
A HELOC may be available to you if you have $40,000 equity. The maximum amount you can spend is $30,000. You can borrow as much as $30,000 but not more.
You only have to repay what you borrowed, just like a credit card. You only have to repay $20,000 if you borrow $20,000 for a kitchen remodel.
Rocket Mortgage does not offer HELOCs.
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