If you own a home (or are just considering buying one), you’ve probably heard the term “home equity” thrown around.
Many tout equity as a huge perk of homeownership — and it is. But what exactly does it mean? And how can you use it once you have it?
Let’s break it down.
What is home equity?
Equity is essentially the portion of the home you actually own. You calculate it by taking your home’s value and subtracting your mortgage balance.
So, for example, if your home is valued at $400,000 and your mortgage balance is $250,000, you have $150,000 in home equity. That’s the portion of your home’s value you own and that is not currently mortgaged.
Equity is also the profit you could likely expect if you sold your home today. In the example above, you’d presumably sell your home for $400,000, use that money to pay off your $250,000 mortgage balance, and then take that $150,000 difference as a profit.
What can you do with home equity?
More home equity means more profit when you sell the house, but it does more than that too.
If you need cash (say to pay off a credit card balance or some high medical bills), you can borrow against your home equity. You might do this through:
- A home equity loan: This is a type of second mortgage that uses your home as collateral. The more equity you have, the more you can borrow and use for whatever purpose you wish.
- A HELOC: Home equity lines of credit (HELOCs) work like credit cards. You get a line of credit (based on your home equity stake) and can withdraw funds as needed. They can be good ways to pay for ongoing home improvements.
- A cash-out refinance: This is when you replace your existing mortgage loan with a new, larger one. You use that loan to pay off your old mortgage and then get the difference back in cash — as a lump-sum payment.
If you’re 62 or older, you can also use your equity to take out a reverse mortgage, which is a type of loan that essentially pays you monthly — rather than the other way around. These can be helpful if you need extra income during retirement.
How are you putting your equity to work?
Curious how much equity you have? Want to leverage it to pay off debts, cover unexpected bills, or make improvements around the house? Get in touch with a Premier Nationwide Lending office today for help.
Premier Nationwide Lending is an Equal Housing Opportunity lender. Sponsored by NTFN, Inc. 6201 West Plano Parkway, Suite 100, Plano, TX 75093 | NTFN NMLS 75333.