Homeownership comes with its fair share of benefits, and the opportunity to build equity is one of the biggest. If you aren’t entirely sure what that entails, you’re not alone. While most prospective buyers are aware that home equity is a good thing, many don’t know what it is, how it could benefit them, or what they can do to start building and leveraging it.
If you’re preparing to buy a home, here’s what you need to know about equity…
What is home equity?
If you have a mortgage, you’re not the only one who has a stake in your property—your lender does, too. Every time you pay down the principal balance on your loan, you own more of your home outright. By increasing your share, you’re building your equity. To determine how much you have now, simply subtract the loan amount you still owe from the appraised value of your property.
How quickly you’re able to build equity through repayment may depend on the type of mortgage you have. It also grows when the value of your home rises (since you don’t owe your lender more money when this happens, and your stake increases proportionally).
Why it matters
Most purchases made with borrowed money depreciate in value quickly (a car is a common example). In contrast, a home typically increases in worth as you pay off the loan you used to buy it. This makes real estate a particularly good long-term investment.
When it comes to building your wealth over time, home equity is key. First off, having a low or non-existent mortgage balance when you sell your property can make for a more substantial payday. Not only that, but if you’re not ready to put your home on the market now, you can borrow against your equity—and invest that money.
How to leverage your equity
In addition to selling your home, you can borrow against your equity. There are two main ways to do this. The first is through a home equity loan, which could allow you to take out up to 80 per cent of your property’s value (though it depends on your lender and how much equity you have). You’ll make repayments in fixed installments, plus interest.
Another option is using a home equity line of credit (HELOC). With an HELOC, you can get up to 65 per cent of your home’s value (when combined with your remaining mortgage balance, this amount can’t equal more than 80 per cent). This money is available as a revolving line of credit, and you pay only the interest.
To make the most of your loan, you can put it towards another investment, reinvest it into your home by making improvements, or pay off your high-interest debt. Whichever route you go, your equity gives you the potential to vastly improve your financial situation.
The bottom line
When it comes to home equity, one of the best things you can do is make regular mortgage payments. This will help you build one of your most valuable assets. When the time comes to tap into it, you can borrow against your equity—and use that money to best advantage with the help of a qualified financial advisor. Alternatively, you can list your property with a knowledgeable local real estate agent for the highest possible return.
Preparing to buy a home? For over 35 years, our clients have trusted us to minimize risk, offer unbiased opinions, and ensure their best interests are served. Contact us today to talk about your needs, by emailing us at email@example.com or calling us at 416-441-2888 ext. 772.