In 2021, the average equity gain was $31,000 for Texas homeowners and $51,500 nationally. Prior to becoming a homeowner, you probably heard that one of the benefits of buying a home is the ability to build equity and tap into that equity to invest in your home, your children’s education, to supplement retirement needs, or to augment the impending sale of a home. But, have you learned what exactly equity is or how you can use it? Michele Harmon Team has a quick guide to help you understand the basics of how home equity works and why it is valuable to you.
What is Home Equity?
Home equity is the current appraised value of your home subtracted by the total amount owed on your mortgage. Here is an example:
Current Home Market Value $600,000
Existing Mortgage $250,000
Homeowner Equity $350,000
Your balance of your existing mortgage can easily be found on your monthly mortgage statement. However, the current market value of your property can be difficult for homeowners to assess on their own.
When you purchase a home, your down payment provides your initial equity, and payments made toward your mortgage increases your equity. In a particularly strong Real Estate market, equity can quickly increase as your property value increases, however, keep in mind that the inverse can also take effect. An abundance of inventory and low performing housing market can lead to a decrease in home values and a reduction in homeowner equity.
You may estimate your home’s current market value by following the sales of similar properties in your neighborhood. Although websites such as Zillow and Trulia provide home value estimates, it is important to note that they are not the most reliable source. In November of 2021, after Zillow chose to discontinue buying and selling homes, the CEO of Zillow admitted that Zillow is not competent in regards to determining home values. “We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated and continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility,” Rich Barton, Zillow Group’s co-founder and CEO, said. The most accurate measurement requires a comparative market analysis from a trusted Real Estate professional or a professional home appraisal.
Utilizing Home Equity
Home equity is a big representation of an individual’s net worth, however, it is not a liquid asset until a property is sold or it is borrowed against. There are two types of loans that allow homeowners to use their home equity as collateral.
- Home Equity Loans
A home equity loan, often called a second mortgage, typically has a fixed rate and a set time to pay it back, generally with equal monthly payments. When you receive a home equity loan, your lender will pay out a single lump sum. Once you have received your loan, you will immediately start repaying it at a fixed interest rate. This option is ideal if you have a large and immediate expense.
- Home Equity Line of Credit
Not all lenders offer home equity loans. Our preferred lender, Jessica Taylor, says “a home equity line of credit is secured by the property. It is like a second lien on the property and is a revolving account where you would only utilize what is needed. You might get approved for a $30,000 line of credit, but if you only need $20,000 to put on a new roof, you can spend that and then make payments on the line of credit, similar to a credit card.” .
Keep in mind that since the financial institution is lending money and using a home as collateral, they will not lend 100% of the home’s equity because the bank does not want to take the risk of the house price dropping. This would require them to carry the loan for more than its market value. Therefore, most banks will allow a qualified homeowner to borrow about 80% of their equity.
How to Use Your Home Equity Wisely
There are multiple great reasons to consider using money from a home equity loan, such as:
- Investing in Your Home
A great way to use your home equity is to create MORE equity in your home. Some of the best returns on your investment include kitchen and bathroom remodels, adding square footage or an extra bathroom, enhancing curb appeal, and structural repairs. Investing in your home is a win-win! You can enjoy the upgrades and add value to your home.
- Use Equity to Buy a New Home
Equity can help you with the purchase of a new home! For example, imagine your home is worth $300,000 and you have built $70,000 worth of equity in it. If you sell your home for what it is worth, you will leave the closing table with profit! You may not receive the entire $70,000 in equity because of closing costs and other fees, but you can end up with a significant profit that you can use for a substantial down payment on your next home!
- Invest in your Children’s Education
You can use your home equity to finance your child’s college education with a rate much lower than the typical student loan.
If you are currently considering retirement, you may want to consider a reverse mortgage. A reverse mortgage will allow you to stop making your monthly mortgage payments, and instead, you will receive money based on the equity in your home. How much you are able to borrow depends on your age and how much equity you have in your home as well as current interest rates.
Your Home is Our Business
Michele Harmon Team performs a weekly comparative analysis and we have found that home prices in our area have increased 17.6% in the last 12 months (some areas even more). If you would like to receive an assessment of the market value of your home and the current equity you can access, click here or give us a call at 713-818-1330 for a complimentary comparative market analysis. It would be our pleasure to assist you!