So you’re officially a homeowner. You make your monthly mortgage payments and maintain your property, just like you’re supposed to. But what does that all really mean? Where is your money going and how are you benefitting from this in the long run?
All of it comes down to equity. It’s a term everyone may know and may think they understand. But let’s break it down further. What does home equity mean, and how do you determine how much equity you have? What does it do for you? How do you get more or use what you have to your advantage?
What is Equity?
To put it simply, equity is the difference between what you owe on your mortgage and what your home is currently worth.
For example, if you purchase a home worth $200,000 with a 20% down payment and a mortgage covering the remaining $160,000, that means you still owe $160,000 on your mortgage but have that you have $40,000 in equity. If the house’s market value remains constant over the next two years, and you make $5,000 of mortgage payments, you would have $45,000 in home equity at the end of the two years.
Maybe your home’s value jumped up to $210,000 in those two years. That would mean you now have even more equity as $210,000 minus $160,000 is $50,000. Meaning your equity increased to $50,000.
If your home value should decrease, however, then that could work against your equity. If after two years, your home is now worth only $195,000, that would mean you now only have $35,000 in equity.
How Do I Determine My Equity?
The only way to get an official home value is to have a real estate appraiser come into your house and determine what your home is worth in the current market.
Otherwise, you can get an estimate of your home’s value by looking at home sales of comparable houses in your area. You can also check with online real estate sales that provide their own estimates. These valuations are not always reliable but can help give you a rough idea of your home’s worth.
How Do I Increase My Equity?
Monthly mortgage payments are the sure-fire way to boost your equity. However, if you’re looking for a way to make a bigger impact in a quicker time, there are a number of ways you can do that.
- Make a big down payment: Your down payment is your initial kick-off into your equity and the higher the amount you put down, the more equity you’re building. Be sure to take your savings and income into consideration when deciding on an amount so you’re not stretching yourself too thin financially.
- Make higher payments: By paying a higher amount toward your mortgage, you’ll boost your equity faster than if you are only paying a minimum amount. You can do this by changing your payments to bi-weekly, increasing your monthly payment amounts, and/or by putting any extra funds you may come across into your mortgage payments when you have them.
- Make home renovations: A great way to boost your home’s value is by making significant, positive changes to the property. Some options are adding an extra bedroom, updating a kitchen, adding a bathroom, or increasing the curb appeal with some landscaping.
How Can My Home Equity Work For Me?
Your equity can be used as your financial safety net. However, since home equity is not a liquid asset, converting it to cash to use for other things is often a costly and complex process that, until now, came in limited options. To access equity, homeowners generally have two options.
Option 1: Traditional Home Sale
- Time to close averages 60-90 days
- Requires you to move
- Costs are usually 7% of the home value.
Option 2: Traditional Lending Solutions
- Strict requirements regarding credit score, job type, and debt to income
- Higher interest rates than the average mortgage
- 25% of Americans do not qualify for any option
Now there is a third option. A sale-leaseback solution offers a way to convert home equity to cash so that it can work for them and their goals.
Option 3: Sale-Leaseback Programs
Through a sale-leaseback, you sell your home, converting your equity into cash while staying as a renter. You don’t have to worry about qualifying for a loan or moving out. Now you can pay off debts, afford costly home renovations, fund a business venture, and so much more.
A sale-leaseback program can make home equity easy to understand and even easier to convert to cash to help you reach your goals without the stress of loans or moving.
Equity can be a complicated subject to understand. Talk to a financial advisor today to learn more about equity and how it can help you reach your financial goals.