What is home equity?
Home equity is the current market value of your home, minus what you owe. You’re looking for a positive number. Any gain comes from:
- Paying down the principal balance on your loan.
- An increase in market value over time.
How does home equity work?
Building home equity is a bit like investing in a long-term instrument, like bonds. Your money is, for the most part, locked up and not spendable. There are some ways to tap it, but wealth is created over years as your share of “free and clear” ownership of the house increases.
It seems simple enough, but home equity is not guaranteed. Just ask any homeowner who went through the last housing bust. That’s when home equity fell sharply for many homeowners — and, in some cases, completely disappeared.
As a rule, building home equity is a slow climb, at best. When it comes to short-term home appreciation, sometimes it’s more of a bungee jump than a climb.
How do you find out how much equity is in your home?
A home equity calculator
can give you an idea of what your home is worth and how much equity you may have, if you’re thinking about selling your home or borrowing a chunk of your equity. An appraisal will really nail down the value of your house.
Why is home equity important?
Home equity can be a long-term strategy for building wealth. Mortgage payments reduce what you owe while your home gains value, so paying on a house has been called “a forced savings account.” This is unlike virtually every other asset purchased with a loan, such as vehicles, which lose value while you pay them off.
Home equity takes time to build
Another nutrient helping to grow home equity wealth is time. Homeowners who stay in their homes longer are more likely to accrue equity. You don’t have to sell to tap the profit inside your home. Instead, you can borrow against that value with a home equity loan or home equity line of credit (HELOC). A home equity loan
will provide you a lump sum; a HELOC allows you to draw on the available balance as you wish.
Home equity is not a get-rich-quick scheme
Building home equity is definitely a long-term proposition. In addition, when it comes to your home equity, don’t borrow more than you need, don’t overspend and don’t put your house at risk of foreclosure for a frivolous purchase. The worst reason to tap home equity is for unnecessary personal expenses. While it may be tempting to spend your hard-earned money on something other than house payments, it is better to devise a savings plan to cover these things than to borrow from your house.
Now is a great time to tap into your home's equity with a loan from Education First. With low rates and easy repayment schedules, a home equity loan can be a valuable tool for responsible borrowers and may provide an easy source of cash. Have questions? Our team can help! Call, click, or stop by
your local Education First FCU branch.