What Is Home Equity & Why Do I Need It?
If you want to know what home equity is, how it works, and what its benefits are, then make sure to read this guide till the end.
What is Home Equity?
Home equity, in simplest terms, can be defined as the difference between the worth of your home and the amount you owe on a home mortgage. You can borrow that difference as a loan, which can be called a second home mortgage because the first one was used for the purchase of the property.
However, you can get additional loans as well if you build enough equity, which is usually gained by paying mortgage payments or getting an increase in property value, which creates the difference between home’s worth and outstanding mortgage.
How Does It Work?
It is pretty simple to understand how home equity works. As you know above; it is the difference between the worth of your home and the outstanding home mortgage, so let’s use some figures to understand it better.
Let’s just say that the value of your home is $500,000 and the mortgage balance is $400,000 then Home equity will be $500,000 – $400,000 = $100,000. So you can potentially borrow $100,000 again as a home mortgage.
Importance of Having Home Equity:
You can reap significant benefits from home equity if you use it right and make mortgage payments on time. By securing mortgage payments, you get a reduction in what you owe, but at the same time, due to the gains in the real estate market, your home gains value as well. So in the future, you can get more money for the property then what you paid as a mortgage. Some more advantages are:
- Lower interest rates than most types of other loans
- Easily get a large sum of money quickly in cash
- The value of your house secures the loan
- Home improvements with loan mean you can claim a tax deduction on the interest
Some finance authority blogs like Nerd Wallet call Home Equity as the long term strategy for building wealth. This also shows how valuable and useful it can be for property owners with mortgage looking to create wealth.
Home Equity Can Help You Become Equity Rich as Well:
Unlike other assets such as vehicles that lose value with time, your house only gains financial value. Meaning, it continuously creates a difference between the home value and mortgage amount so you can borrow more home equity loans whenever you are short on cash while your home value only increases with time.
The first step towards getting benefits from home equity is to find a property with a good neighborhood and get a mortgage on it. Then as you make payments, the value of the property will grow with time as well, and you can get an additional home mortgage.