One of the many benefits of homeownership is that you can build equity in your home and tap into it to achieve your financial goals. Home equity can be a powerful financial tool to pay off high-interest debt, conduct home repairs and renovations, and so much more.
But what exactly is home equity and how can you use it to your advantage?
What is home equity?
Equity is the difference between what you owe on your mortgage versus what your home is currently worth. For example, if you currently owe $100,000 on your mortgage and your home is worth $270,000, then you have $170,000 of equity in your home.
Home equity represents so much more than a mortgage loan being paid off. It is an asset that homeowners can borrow against to achieve their financial goals. Fortunately, there are a number of ways you can build equity in your home to achieve such goals.
How do you build equity?
There are a number of ways to increase your home equity, such as making a large down payment, paying off your mortgage, and paying more than the minimum.
- Make a large down payment
The quickest way to build equity in your home is to make a large down payment. The larger your down payment, the more equity you’ll immediately have in your home.
For example, if you purchase a home for $150,000 and put down $10,000, you’ll owe $140,000 on your mortgage and have $10,000 in equity. If you put $20,000 down on the same home, you’ll owe $130,000 and have $20,000 in equity.
- Pay off your mortgage
A portion of each mortgage payment goes toward the principal balance on your home loan. The longer you have your mortgage, the more money will go toward reducing your principal balance and building your home equity.
- Pay more than the minimum
You can always pay more than your required mortgage payment each month. Making an extra payment each year, making biweekly payments, or even paying an extra $100 a month can help you decrease your loan’s principal balance and increase your home equity at a faster rate.
How can you use home equity to your advantage?
As stated previously, home equity is one of the greatest financial benefits of owning a home. You can access the equity you’ve built up in your home for several different purposes, including:
- Removing private mortgage insurance (PMI)
- Making home improvements
- Purchasing a new home
- Paying for college tuition
- Consolidating high-interest debts
- Starting a business
How can you access your home equity?
There are several ways you can access your home equity, but the most common way is through a cash-out refinance. A cash-out refinance is a type of mortgage refinance that allows you to take advantage of the equity you’ve built up in your home by getting a new mortgage with a higher loan amount.
For example, if you have a principal balance of $180,000 on your mortgage, you can refinance your home for $220,000 and receive $40,000 in cash.
You can use the money from a cash-out refinance for anything you want. There are no restrictions on how you can use it. Whether you want to remodel your kitchen or consolidate high-interest debts, a cash-out refinance can be a powerful loan option and get you the cash you need to move towards your financial goals.
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Originally published May 8, 2020, updated August 24, 2022.