What is Home Equity? How Do I Access It?
Home Equity
Think of home equity as the money that's locked inside your house, but it's yours. To get your hands on this money, you basically have two options: sell your house or do a bit of financial restructuring called refinancing, where you take out a new mortgage. Let's break down how you can tap into your home equity.
Home Equity Calculation:
Home equity is calculated by subtracting your remaining mortgage balance from its current market value.
Example: Imagine you own a property appraised at $150,000 with an outstanding mortgage of $80,000. The home equity here is $70,000 ($150,000-$80,000=$70,000).
How Does My Home Equity Increase Over Time?
As you make mortgage payments, your home equity grows. The principal part of your mortgage payment subtracts from your mortgage balance. Assuming your home value remains the same, your equity increases.
How Do I Access My Home Equity?
You have two options to access your home equity.
1. Sell your house - When you sell your house, you receive the money from the sale price and your mortgage is paid off if you have a mortgage.
Example:
Home Value - $500,000
Mortgage Balance - $300,000
Home Equity = $500,000 - $300,000 = $200,000.
When you sell the home for $500,000, you will receive this $200,000 minus any realtor and mortgage fees
2. Refinance Your House - When you refinance your home, you are borrowing money against the value of your home. In most cases, you can borrow up to 80% of the value of your home. You will pay out your old mortgage (assuming you have one) and have a new mortgage with a larger balance. Or, you can add a second mortgage behind your first mortgage, up to 80% LTV.
Example 1: Refinance and mortgage replacement
Home Value - $500,000
Existing Mortgage - $300,000
New Mortgage - $400,000 (80% Loan-to-value LTV)
$100,000 worth of home equity accessed
Example 2: Refinance with a second mortgage
Home Value - $500,000
Existing Mortgage $300,000
Second Mortgage - $100,000 (80% Loan-to-value LTV)
Total Mortgages - $400,000
$100,000 worth of home equity was accessed.
How Can I Use My Home Equity?
Property Improvements: One practical use of home equity is funnelling it into home improvements or renovations. It's not about glamorizing your property for the sake of it; it's about making your living space better for you.
Example: Let's say you have $30,000 in home equity. You might consider using it to renovate your kitchen, bathroom and even finish your basement.
Education Support: Home equity can serve as a money source for education. Everyone knows post-secondary education has become expensive. You have the ability to use your home equity for this equity if you choose to do so.
Example: With $40,000 in home equity, you could allocate funds to cover educational costs for you or your children.
Debt Management: Use home equity to consolidate debts. It's a potential tool to make managing debts more manageable and reduce your interest rate.
Example: Imagine you have $50,000 in home equity. By consolidating high-interest debts, you streamline your 22% credit card interest and save money in the long run.
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Things To Consider When Accessing Your Home Equity
When deciding to access home equity, keep the following in mind:
Loan-to-Value Ratio: You can typically access up to 80% of your home's value for home equity. This isn't a marketing limit; it's a financial safeguard for the lender to ensure they don't go upside down on their asset.
Accessing Home Equity: Home equity isn't a vault; you can access it through tools like a Home Equity Line of Credit (HELOC) or by refinancing your mortgage. These aren't just financial products; they're mechanisms for responsible and strategic use of your accrued equity.
Interest Rates: Stay aware of interest rates, not for speculative gains, but to make informed decisions aligned with your financial situation.
Market Awareness: Be mindful of real estate market trends, not as a speculative investor, but to understand the potential impact on your property's value.
In conclusion, home equity isn't just a number; it's a practical aspect of homeownership. Understanding and utilizing it is important to understand for your current finances. If you're looking for more insights or real-life examples, feel free to reach out. This guide is here to offer practical perspectives on understanding home equity in simple terms.
TL;DR
Home Equity Access: It's like the money locked in your house, accessible by selling or refinancing.
Calculation: Subtract your remaining mortgage from the current home value to determine equity.
Practical Uses: Accessed equity can be used for property improvements, education support, or debt management.
Questions/Comments?
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