Home equity can be one of your biggest assets as a homeowner. It builds over time as you make monthly mortgage payments, and you can use this equity in your home to your advantage. Therefore, it’s important to understand the basics of how home equity works and how it can help you.
What is Home Equity?
Home equity represents the portion of your home that you truly own. It is the difference between your mortgage balance and your home's current market value. For instance, if you purchase a home and make a 10% down payment, you immediately have 10% equity in the home. Here’s an example with numbers: If you owe $100,000 on a mortgage and your home is valued at $250,000, you have $150,000 in home equity.
How to Build Equity in Your Home
Owning a home is not just about having a place to live; it’s a significant investment. One of the major perks of homeownership is the possibility of building wealth over time. As with any investment, the goal is to increase value. With a home purchase, you’re building equity over the life of the loan. The equity you accumulate can be leveraged for financial freedom. However, it is important to note that equity can increase or decrease over time. While the goal is to increase equity, a decline in home equity is possible, typically due to a decrease in home value.
Large Down Payment
One of the most straightforward ways to build equity is by making a large down payment. A substantial down payment not only reduces your mortgage balance but also increases your equity from the start. For example, if a home costs $400,000 and you put down $80,000, your loan amount is $320,000. Before any payments are made towards the loan, you already have $80,000 in equity.
Make Payments on Time
You can build home equity simply by making your regular mortgage payments on time. Each payment reduces your principal balance, which in turn increases your equity. This is because with every payment, a portion goes towards reducing the principal balance, not just the interest.
Pro Tip: To build equity faster, make larger payments towards the principal whenever possible.
Home Improvements
Investing in home improvements is another effective way to increase your home’s value and thus its equity. Remodeling and upgrading your home—whether it's a kitchen renovation, bathroom remodel, adding a pool, or making energy-efficient upgrades—can significantly enhance your home's value. Higher home value translates into higher equity.
How to Access Home Equity
Your home equity is a valuable asset that can be accessed and utilized in several ways:
Cash-Out Refinance†
A cash-out refinance allows you to replace your existing mortgage with a new loan that’s larger than the current mortgage. The difference between the two loans (your home equity) is given to you in cash. This lump sum can be used for any purpose you choose.
Newrez Home Equity Loan††
The Newrez Home Equity Loan is specifically designed for homeowners who want to tap into their home’s equity without altering their current mortgage. This loan product allows you to keep your primary mortgage interest rate while securing a second mortgage with a fixed interest rate. The loan is disbursed in a lump sum at the beginning, and repayment starts immediately through fixed monthly principal and interest (P&I) payments. Since this loan is secured by your home, it generally offers larger sums of money at lower interest rates compared to credit cards or personal loans.
Ways to Use Home Equity
Your home equity can be utilized in several beneficial ways, providing you with the financial flexibility to achieve your goals.
Consolidate Debt
One popular use of home equity is to consolidate debt. By using the cash from a home equity loan or cash-out refinance, you can pay off high-interest debts such as credit card balances, auto loans, or student loans. This not only simplifies your finances but may also improve your credit score by reducing your overall debt load.
Fund Major Expenses
Home equity can be a financial lifesaver for major expenses. Whether it’s funding a child’s education, covering medical expenses, or investing in a business, the equity in your home can provide the necessary funds without the high interest rates of other loans.
Take a Vacation
Everyone deserves a break, and using your home equity to fund a vacation is a perfectly valid choice. The equity you've built in your home can be a source of funds for that dream trip, allowing you to relax and enjoy life without worrying about budget constraints.
Your Home Equity is Yours to Use
The most important takeaway about home equity is that it offers financial strength, security, and leverage. Whether you decide to let your equity grow over time, cash it out, or borrow against it, know that it provides you with options to live the life you want.
By understanding and leveraging home equity, you can enhance your financial flexibility and achieve your personal and financial goals. Whether it's through making smart investments in your home, diligently paying your mortgage, or accessing the funds when needed, your home equity is a powerful tool in building your future.
Disclaimer:
†By refinancing an existing loan, the total finance charges may be higher over the life of the loan. We may transfer the escrow account balance from the current loan to the new loan. If the current escrow amount is insufficient due to changes in taxes or insurance, we may require additional money when closing on the new loan.
††The rate on your existing mortgage will not change. The Newrez Home Equity Loan program requires borrower to obtain a second mortgage at current market rates. Loan amount based on underwriting guidelines. Minimum 660 credit score. Minimum and maximum loan amounts apply. Program financing only available on properties with one existing mortgage lien and subject to maximum loan-to-value ratio. Not available in all states or territories. Other terms and restrictions apply. Please contact us for more information.
