Your home is more than just a building; it’s a place where comfort, memories, and personal value come together. But your home is also a significant financial asset, one that can help you achieve other goals if you understand how to use it wisely. This financial power comes in the form of home equity.
What is Home Equity?
Home equity is the portion of your home that you own, free and clear of any mortgage and debt. In simpler terms, it’s the difference between the market value of your home and the balance of any mortgages or loans secured by the property.
For example, if your home is valued at $400,000 and you owe $250,000 on your mortgage, your home equity is $150,000. As you continue to make mortgage payments or if your home increases in value, your equity grows.
How Can You Build Home Equity?
Building home equity happens in two main ways:
1. Paying down your mortgage: every time you make a principal and interest repayment on your mortgage, a portion of that payment reduces the principal balance, thereby increasing your equity.
2. Appreciation in home value: if the real estate market is favourable and the value of your home increases, your equity will rise even if you’re not reducing the principal loan amount.
Ways to Use Your Home Equity
Once you’ve built up significant equity in your home, you can tap into it for various financial needs. Here are the most common ways to leverage your home equity:
1. Home Equity Loan
A home equity loan allows you to borrow a lump sum of money against your home’s equity.
When to use it: a home equity loan is ideal for large, one-time expenses such as home renovations, debt consolidation, or paying for major life events like weddings or purchasing a car.
2. Cash-Out Refinance
A cash-out refinance involves replacing your current mortgage with a new, larger one, and taking the difference in cash. This option essentially allows you to refinance your mortgage while accessing some of the equity in your home.
When to use it: this option is beneficial when you want to take advantage of lower interest rates or if you need a substantial amount of cash for investments, debt repayment, or other large expenses.
3. Equity for a deposit
Home equity is a versatile financial tool, and one of the smartest ways to leverage it is by using it as a deposit when purchasing a new property. Whether you’re upgrading, downsizing, or buying an investment property, tapping into the equity you’ve built in your current home can help you move forward without the need for substantial savings
When to use it: to use as a deposit for the property you are purchasing.
Considerations Before Using Home Equity
While leveraging your home equity can provide financial benefits, it’s important to approach it with caution:
• Interest rates: compare interest rates and terms to ensure you're getting a deal that makes sense for your financial situation.
• Affordability: borrowing against your home equity means that your home is used as collateral. Therefore, increasing your borrowing limit and increasing the monthly repayments.
• Cost of borrowing: be mindful of fees and potential changes in interest rates that could affect the total cost of borrowing now and in the future.
• Loan Terms: Be mindful that a longer loan term results in paying interest over an extended period. You may want to consider a split loan with a shorter loan term.
Final Thoughts!
Home equity can be a powerful tool in your financial toolkit, providing access to funds that can help you achieve your goals. Whether you’re looking to improve your home, consolidate debt, or secure your retirement, understanding how to use home equity responsibly is key to making the most of this valuable asset.
It’s always best to seek advice from our brokers, as they will help determine the most effective options for you while explaining the risks and benefits.
