At First Fidelis LLC, we hope to provide homeowners and potential buyers with all of the information needed to make smart financial decisions, especially when these decisions involve their homes. We get a lot of questions about home equity, so we want to provide homeowners with the information necessary to make decisions that may involve their equity stake.
What Is Home Equity?
A homeowner gains home equity as they pay off their mortgage. When a homebuyer puts down 20 percent of the home’s current value as their down payment, this is the equity stake they start out having. Let’s say that your home was valued at $300,000 when you bought it, and you put down $60,000 to purchase it plus your mortgage. This means your home equity was 20 percent.
Home equity is the difference between your home’s value and what you still owe on your home loan. As you pay the mortgage, you slowly acquire more home equity. Your home equity can fluctuate depending on housing market trends. If the market rises, your home’s value may increase to $450,000. Let’s say that you have paid $110,000 of your home loan, and you owe $150,000. Your home equity is 66 percent, rather than 50 percent.
As the market rises, your home’s value increases, and so does your equity stake. Your home’s value can also increase based on the its location and condition.
How Do You Grow Your Home Equity?
While your home equity grows as you pay your mortgage, there are other things you can do to increase your home’s value, and therefore, your equity stake. Renovations and home improvement projects are a great way to increase the value of your home. Finishing the basement, renovating the kitchen, and replacing flooring are all things that offer a high return on investment when it comes time to sell your home.
Another way to build up home equity is to opt for accelerated payment options. Rather than making monthly mortgage payments, you would make two payments per month. In a month, you won’t notice much of a difference financially. However, at the end of the year, you will have paid off more of your mortgage than if you choose the monthly option.
Why Is Home Equity Important?
Home equity is an asset, and there are numerous ways that you can use it. First, you can use home equity to upsize, downsize, or buy a new home that better suits your current needs. When you sell your home, some of the buyer’s money will go to paying off the remaining sum on your mortgage. However, the rest can go toward buying a new home. If you choose not to buy a new home, this money can go right into your savings for retirement.
You can also use home equity for a cash-out refinance of your home. A cash-out refinance replaces your home loan with a new mortgage. This may be a good option if you originally signed your mortgage when interest rates were higher, and now you are able to get a better deal.
Whether you are looking to purchase a new home or refinance your current one, First Fidelis LLC is here to help. Our mortgage lenders can answer any questions you may have about your current home equity and how you can use it to your advantage! Contact us today for more information.