What is Equity?


home equity
The term equity is the ownership of assets associated with liabilities or debts. In a mortgage, equity is the portion of your home that you truly ‘own’. Until you clear off your mortgage, your lender will always have an interest in your property. For many homeowners, equity can be a powerful tool. Considering that it increases through your monthly mortgage payments, the list of ways home equity can benefit you is endless. 

The Definition of Equity 

Equity is the difference between a home’s current value and the mortgage’s principal balance. It’s the amount of your home that is truly yours at a particular given time. Your home’s equity can increase as you make monthly mortgage payments. It can also increase if the property value rises. The vice versa can also happen, whereby the home equity decreases as the home’s value falls.  

How Does Equity Work? 

Let’s take the following example. You buy a home through a mortgage at the cost of $300,000. The lender asks you to provide a down payment of 10%, which is equivalent to $30,000. The mortgage lender will then offer a loan of $270,000. At that moment, your equity will be $30,000.  Three years later, assuming you have been paying the mortgage on time and currently have a mortgage balance of $250,000. To calculate your home equity, you must find out the current value of your home. If the value has jumped to $310,000, you have an equity of $310,000 minus the mortgage balance of $250,000, which is $60,000.  When calculating home equity, two critical factors have to be considered. One is the home’s current value, which can best be determined by an official valuator who will use current markets. The second thing is the mortgage balance.   

Ways to Build Home Equity 

Building high home equity comes with many benefits, which we will discuss later. You can build your home equity through:

1.    Paying Off Mortgage 

With each payment, the money is allocated to the principal balance, loan interest, property taxes, and other costs. The longer you pay off your mortgage, the lower your principal balance gets. Please note that not all loans work this way. You must confirm if your monthly payments deduct the principal balance. Lest this method won’t be very effective at building equity.

2.    Make a Significant Down Payment 

This is the quickest way to build equity. For a home that costs $300,000, if you make a down payment of $60,000, that’s the amount that will stand as your equity. 

3.    Pay Extra on the Monthly Installments 

This can be challenging because of financial constraints. But if you have the ability, paying more will lower the principal balance and build more equity. 

4.    Increase the Value of Your Home

When it comes to increasing home value, certain strategies come into play. The first is conducting a renovation. Renovating your home to modern designs and standards adds value. You can also remodel the kitchen or add an extra bedroom or bathroom(s).  Landscaping also contributes to the same. There is another method that doesn’t involve costly renovations, and that is staying in your home for at least five years. Most homes add value after a while. Depending on your home’s market, you may notice a significant jump in prices. That will boost your equity.   

What are the Uses/Benefits of Home Equity? 

1.    Buy a Bigger Home 

Having built a significant amount of equity, you are assured of walking away with the equity as profit when you decide to move home. That money can be used to make a large down payment on a much bigger and better home. 

2.    Get a Reverse Mortgage 

Home equity can be used to get a reverse mortgage for those considering retirement. This will see you or your loved one receive a one-time lump sum or installments for retirement. 

3.    Home Equity Loans 

This type of loan allows you to borrow from your equity and use the funds however you please. A home equity loan is often slightly lower than the current equity. And it also comes with interest. The funds obtained from a home equity loan can be used to pay for tuition, home renovations, and other expenses the homeowner may have. 

4.    Opt for Cash-Out Refinance 

You can ‘cash out’ your equity with this type of loan by getting a new mortgage with a higher loan amount. This is an excellent way of utilizing your home equity to get money for various expenses.  Home equity is an asset that can come in handy in many situations. There are many ways to utilize your home equity such as cash-out refinance and home equity loans, so taking the necessary measures to build it is crucial. 

A Lending Hand for Financing Home Mortgages

Spire Financial (A Division of AmeriFirst Financial Inc.) brings lending expertise to you. All of our loan officers offer personalized communication for every client, guiding them through the process. We can show you ways to maximize your finances and unlock future opportunities. Spire Financial keeps you in control of refinancing, debt consolidation, and home equity. Together, we can achieve your financial goals.

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Disclaimer


Spire Financial, a division of AmeriFirst Financial, Inc., 1550 E. McKellips Road, Suite 117, Mesa, AZ 85203 (NMLS # 145368). 303-595-0110. © 2022. All Rights Reserved. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates, and programs are subject to change without prior notice. All products are subject to credit and property approval. Not all products are available in all states or for all loan amounts. Other restrictions and limitations apply. AmeriFirst Financial, Inc. is an independent mortgage lender and is not affiliated with the Department of Housing and Urban Development or the Federal Housing Administration. Not intended for legal or financial advice. Visit https://amerifirstloan.com/pages/state-licensing for all state licenses information. Visit NMLS Consumer Access at https://www.nmlsconsumeraccess.org/

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