How Do I Calculate My Home Equity?
Purchasing a home is one of the most significant investments you’ll make in your lifetime, with the equity building in your home as a powerful tool in your financial back pocket. Many homeowners may be aware of the potential equity they’ve built over time, but some may not quite understand how home equity works or how it’s calculated.
What is home equity anyway?
Home equity is the accumulative value of a homeowner’s stake in their home. The available equity in your home is the property’s current market value, not including current loans or liens attached to the property. Or, put another way, your home equity is the difference between the appraised worth of your property and the amount still owed on the mortgage and other loans tied to the property.
Now that we understand what equity is, let’s talk about how that calculation can change. When it comes to assessing the equity, we first need to understand how the equity in your home can both grow and shrink. We all witnessed the booming housing market last year and how it impacted home values. When it comes to increasing or shrinking, the fair market value plays a prominent role in the equity available in your home.
As the market value of your home goes up or down, so does the available equity in your home. Another way in which the equity in your home can shrink is by borrowing against the equity that is available in your home. Borrowing against your equity doesn’t take away from the value of your home. Instead, it uses the equity as a powerful resource toward consolidating debt, financing home improvements, or even paying for your family’s higher education.
Increasing your equity
Building equity in your home can take time over the life of your mortgage, but there are ways in which you can pack on the available value in your home. Did you know making one extra payment each year, or 1/12 of a payment each month, can reduce the length of your loan and save money on interest over the life of your loan? This may seem small, but it has the power to create more equity for you over time.
- Get a raise, or perhaps you’ve freed up a little extra cash in your budget? Putting a little extra toward your monthly payment each month can chip away at the balance of your mortgage loan, thus creating an opportunity for growing your equity.
- Got yourself a lump sum of money, or looking for a way to put your tax refunds to good use? Making a lump sum payment towards the principal on your mortgage can also be a great way to quickly grow the availability of your home’s equity and build your wealth.
Tapping into your equity
Taking advantage of a home equity loan or line of credit can be a cost-saving way to pay off higher-interest debt, or finally, tackle those home improvement projects you’ve been putting off. Here are the two ways to tap into a home’s equity:
- Home Equity Line of Credit: The first way you can utilize the equity in your home is through a home equity line of credit (HELOC). A HELOC is a flexible revolving loan where you can use as little or as much as you need. With low and competitive rates, a HELOC is a homeowner’s secret weapon that can give you the ability to use your home’s equity in whatever ways you financially see fit.
- Home Equity Loan: The second way you can tap into your equity is through a home equity loan. With fixed low rates and up to 10 years to repay, this one-time disbursal loan is a great way to use your home’s equity for the things that matter most to you.
Your home’s equity is one of the greatest wealth-building tools available to you. Whatever your financial goals may be, knowing how to tap into your asset when you need it can truly open the door to your financial health and wellness. Check out our previous home equity insights below or our lending options as you consider the best ways to utilize your home’s equity.
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