For many Americans, a home is the most valuable asset in their possession. But not every home is owned outright. Less than 40% of Americans are free and clear of their mortgage.
The fact is, most people need the help of a mortgage loan to acquire their property. And, in that case, their home equity is the actual stake in the home that they do own.
But what does it mean to have equity in a home? How do you calculate it? What are the benefits of having equity? What does home equity mean?
Here’s what you need to know.
What Does Home Equity Mean?
The home equity meaning is quite simple—it’s the current market value of the home minus the balance of your mortgage. Put simply, the home’s price minus the bank’s ownership stake and interest is what you truly own.
So, for instance, if your home is valued at $1,000,000 and you owe $450,000 in mortgage payments, the difference of $550,000 is your home equity. By dividing that equity from the home value, you can calculate a 55% equity stake
In this case, the mortgage lender doesn’t own the property. Rather, the property is used as collateral. The mortgage lender puts a lien against it to make sure that you pay your bill. After you have paid off both the initial home value and the interest of the loan, the home is all yours.
How Does Home Equity Work?
Equity is not static. It can increase or decrease depending on the circumstances.
There are two primary ways you increase your home’s equity:
- Pay down the principal balance – At the beginning of your journey as a homeowner, you may have only a small percentage to your name. But, as you make your monthly mortgage payment, part of that installment goes toward paying your interest for the loan, and the other part goes toward paying off the loan’s principal. And when the loan balance goes down, your equity stake goes up.
- An increase in market value – A home’s market value is subject to fluctuations. For instance, due to Covid-19, there was a surge of market demand that drove up the price of houses across the country. There has been a staggering 24% annual increase in the median estimated home price since the Pandemic began.
Using our previous example, let’s pretend your home value doubled from $1,000,000 to $2,000,000 thanks to market increases and home improvements that increased the property’s worth. As a result, your home equity is $1,550,000. By dividing that equity by the home’s value, you now have an equity stake of 78%.
But home equity isn’t always fated to increase.
In many cases, there are external factors that dictate whether prices increase or decrease. For instance, if you live in a town with a declining population, there may be less demand for homes. As a result, lack of demand can drive down the average price of a home. Were that to occur, your home equity may then decrease.
Why Is it Good to Have Equity in Your Home?
Owning your home, even if it’s not owned in full, helps protect you from risk. Should something bad occur, that’s a valuable asset you can leverage should the need arise.
This is why building equity is often considered to be preferable to renting. Instead of simply paying money each month to live in a place that someone else owns, you pay to slowly acquire your property.
It may take time to build up your equity, but having patience and persistence is worth it.
Benefits of home equity include:
A Valuable Asset
You may not always want to live in your home. Eventually, you may decide to sell it. That could be to downsize, move to a new location, upgrade, or simply take advantage of a seller’s market. If you do decide to sell the home, the more equity you own, the more profits you can take, especially if your home has increased in value.
Over time, building equity increases your net worth. And, historically speaking, it’s one of the better investments American’s can make. According to the Federal Reserve’s 2020 Survey of Consumer Finances:
Homeowners have a net worth that is more than 40 times greater than their renter counterparts, which reinforces the idea that owning a home is a smart financial move. Homeowners had a median net worth of $255,000 in 2019; renters had a median net worth of just $6,300.
And, as the survey notes, it’s not just the home’s value that’s beneficial. It’s also the mindset of being financially responsible enough to save up for a down payment, qualify for a mortgage, and then budget efficiently to pay off your mortgage debt.
Converting Your Home Equity to Cash
Life is full of uncertainties. You never know what the future holds. But having home equity is a valuable hedge against life’s risks.
Home equity is an asset that you can tap into when you need it. Wondering how to use home equity? It could be used for a medical emergency, pay for upgrades in your home, to fund a business venture, consolidate your debts, or pay off college loans.
And today, there are a variety of ways you can convert your equity into cash including:
- A home equity loan – A second mortgage loan leverages the equity accrued in the home as collateral. Typically you need to have at least a 15%–20% equity stake to borrow up to 85% of the home’s value. In exchange for the loan, you receive a one-time lump sum that needs to be repaid at a fixed interest rate. However, there are pros and cons of home equity loans that are important to consider before you go this route.
- A HELOC – If you have at least 15% home equity and a decent credit score, a home equity line of credit (HELOC) lets you borrow cash against your home’s value and equity. Unlike a home equity loan, a HELOC works more like a revolving line of credit. The loan funds are drawn as needed.
- Cash-out refinance – A cash out refinance is a type of mortgage refinance that typically goes for more than the amount owed. In this case, the borrower withdraws that difference in cash. This replaces your current home loan with a larger one, allowing you to withdraw a portion of your home’s equity in one lump sum. A cash out refinance is a common route taken by homeowners that want to remodel, especially since the upgrades will very likely increase the home’s value, and thus increase their equity stake.
Benefits of Tapping into Your Home Equity
Depending on your circumstances, using your home equity can be a savvy financial decision for the following reasons:
- Tax benefits – Current tax laws allow homeowners to deduct the interest on home equity loans or HELOCs if the money is used to then fund home improvements so long as they are used to: “Buy, build or substantially improve the taxpayer’s home that secures the loan.” That said, there are limits to how much interest can be deducted.
- Low-interest rates – Compared to a credit card or some other unsecured loan, a secured loan that’s backed by your home will typically have a much lower interest rate. And, in the case of a HELOC, you only pay interest on the money borrowed.
- Flexible term periods – Most loans that tap into your home’s equity tend to have flexible repayment periods of approximately 20–30 years. So long as you make your payments on schedule, you’ll eventually pay off the loan balance.
EasyKnock—Your Way of Accessing Home Equity
So what does equity in a house mean? Essentially, equity in a home is one of the most important ways Americans can accrue wealth. By investing in a home, you gain access to an asset that accrues value over time. And that value can then be leveraged if need be.
But traditional means of tapping into a home’s equity are outmoded. The barrier to entry is often quite high. There may be income or credit requirements that prevent you from acquiring the loan. Not to mention, it’s rarely a good idea to stack debt atop an existing mortgage.
That’s where EasyKnock provides a better alternative that makes your home equity work for you. Thanks to our unique sale-leaseback program, we purchase your home outright, allowing you to remain as a renter and still convert the most money from your equity.
Many lenders won’t offer loans to Americans with low credit scores, income types, or other restrictions. But with EasyKnock’s new and inclusive solutions, there’s now a better way.
How much cash could you get by converting your home’s equity with Easy Knock? Get qualified today!
Are you looking to gain equity from your home? We will offer a solution to obtain this equity found in your house. If you are still unsure of alternative options to securing this equity after reading this article, consult a financial advisor to discuss your options.
- Forbes. Nearly 40% of homes in the U.S. are Free and Clear of a Mortgage. https://www.forbes.com/sites/brendarichardson/2019/07/26/nearly-40-of-homes-in-the-us-are-free-and-clear-of-a-mortgage/?sh=2f4f83f247c2
- Fortune. Home prices are rising faster than ever before. https://fortune.com/2021/07/21/home-prices-rising-us-record-rate-2021-update/
- The Balance. How to Build Equity and Own More of Your Home. https://www.thebalance.com/build-equity-315654
- Forbes. Is Buying A Home Worth It? To Find Out, We Asked Nearly Two Dozen Experts. https://www.forbes.com/advisor/mortgages/is-buying-a-home-worth-it/