Homeownership is often mentioned as a means of accumulating wealth. So, what exactly is home equity, and how does it help you increase your wealth? Home equity is the difference between the current market value of your home and the amount you owe on it. Any gain is generated from:
•Paying down the loan's principal balance.
•An increase in the market's value over time.
Why is home equity important? Mortgage payments minimize your home debt while increasing the equity of your home, so it's been dubbed "a forced savings account." This is in contrast to almost any other commodity bought with a loan, such as a car, which loses value as you pay it off. Homeowners who live in their homes for a longer period of time are more likely to build up equity, this isn’t a get rich quick scheme.
Many people also use home equity to make improvements to their homes that increase their value. This would favor you in the long term by allowing you to sell at a higher price. You can increase the value of your home by renovating the old kitchen, adding more space, Investing in landscaping and enhancing the curb appeal of your home can also help.
“This report takes a deep dive into the reasons for remodeling, the success of taking on projects, and the increased happiness found in the home once a project is completed.“ Remodeling Impact by National Association of REALTORS® Research Group
How To Use Home Equity
Equity is an important financial tool and one of the greatest financial benefits of owning a home. When you sell your current home and buy a bigger, more costly one, you can tap into this equity. You may also put the equity toward major home renovations, debt consolidation, or retirement planning. Maybe you've lived in your house for seven, eight, or nine years. Or maybe as a family grows and requires more room, the equity built up in a starter home can be used to fund a down payment on a larger home. Perhaps your career requires you to move to a new city. Whatever the case might be, you're happy to sell your house and relocate. When you make this decision, equity can be your best friend.
Of course, unless you were looking to move anyway, you wouldn't sell your home to obtain equity. As a result, the majority of homeowners who want to cash out their home equity while still living in it use one of three methods:
Cash-out refinance— You swap your old mortgage with a new one that has a higher loan sum, and you get a check for the difference.Closing costs are typically the highest, but mortgage rates are typically the lowest.
Home equity Loan (HEL) — As a second mortgage, you take out a lump sum loan. You repay it over a certain period of time, normally at a fixed interest rate. This is a recurring payment in addition to the regular mortgage payment.
Home equity line of credit (HELOC) — This is a bit like a credit card. You get a credit limit you can borrow against, pay back, and reborrow as often as you want within a certain time frame (the ‘draw period’). HELOCs typically have variable interest rates that are much, much lower than credit cards. But these loans are complicated so make sure you fully understand them before you commit.
Since equity is a type of asset, it accounts for a portion of your overall net worth. If you need to, you can take partial or lump-sum withdrawals from your equity, or you can leave your entire estate to your heirs.
It’s up to you to decide what you borrow and spend from your home equity. There are many ways to put some of your home equity to use if you plan to do so. Many financial consultants, on the other hand, will warn against investing to support an unhealthy lifestyle or indulge in personal whims. Using home equity to pay for a holiday, funeral, or other one-time cost with little return on investment, for example, is usually considered a risky decision.
It's one thing to throw your house on the line in the event of a rare emergency that affects your financial stability, but it's quite another to do so with extravagant purchases.
The MAIN consideration to keep in mind when borrowing from home equity is that your house is used as collateral.
Build Wealth With Home Equity
Equity can be one of your most valuable assets, you can later use this asset to your benefit if you're smart about it. Home prices have historically increased over time, accumulating equity in your home without you having to do something. The house price index has been trending upward in the United States for the last five years, according to data from the Federal Housing Finance Agency.
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