Home Improvement

What Is Home Equity? A New Homeowner’s Guide

Home equity: everyone has heard the term, but how many people actually understand what it is? If you’ve bought a home, you’ve heard the word. But what is home equity?

In simple terms, home equity refers to the stake you own in your home versus what your lender owns. 

Let’s explore the basics of home equity and get a better understanding. 

What Is Home Equity?

One of the biggest assets a homeowner has is their home equity. Home equity is the part of your home you’ve paid off. It’s the part of your home that you own, versus the part of your home you still owe money on.  

How Is Home Equity Calculated?

You can calculate your home’s equity based on current market value. Contact a real estate agent to get the full market value of your home.

Take that figure and subtract the amount you owe on your mortgage, plus any other home debt. What remains is the equity you have in your home. 

How Do I Build Home Equity?

Home equity builds over time; as you pay off your home loan, your equity increases. There are a few other ways you can build your home equity. Making mortgage payments increases your equity.

Paying more toward your principal each month decreases your home loan faster. Making a larger than normal down payment (20% is the average down payment amount) will boost your home equity. 

Home improvements can also add equity to your home. Renovations will increase the market value of your home, which in turn increases your equity. 

How Can I Use Home Equity?

The most common way to use equity is as a down payment toward a new home. When you sell your home and buy a new one, the home equity you have returns to you at closing. You can then use that money toward a down payment on your new home. 

Another way to use your home’s equity is by getting a home equity loan or a home equity line of credit (HELOC.)

How Do I Get a Home Equity Loan?

Many financial institutions can help you get a home equity loan. Most banks require a solid credit score.

If your credit score is less than perfect, a credit repair company can help you get good credit. Whether you need to build or repair your credit, they can help you reach your credit goals.

Should I Get a Home Equity Loan?

Now that your question, “What is home equity?” is answered, let’s talk about whether getting a home equity loan is a good decision. There are many reasons why people choose to borrow against their home’s equity.

Taking out a home equity loan may be a smart choice for renovating your home. Home equity loans often come with lower interest rates and tax benefits. 

Before taking out an equity loan, make sure you can make your payments on time. Failure to pay can result in the foreclosure of your home. 

Home equity loans aren’t a great option for everyone. Contact a bank to see if you’re a good candidate to benefit from one.

You can find other great homeownership advice on our website in our “Real Estate” section.