How Can Your Home Equity Work for You?

Equity Works for Home Article

Summary: Equity is the difference between your mortgage amount and how much your home is worth. It is an asset in building wealth. A variety of circumstances, such as the housing market or home renovations, can help increase the equity within your home. Utilizing a cash-out refinance is one of the simplest ways to have your equity work for you.

What is Equity?

Home equity is the difference between your mortgage amount and how much your home is worth.

Your home equity has the opportunity to increase in many ways:

  • A Generous Down Payment
    • When you buy a house, your down payment is the initial amount of equity you hold.
    • The larger the down payment the more immediate equity you are sitting on.
  • Paying Down Your Mortgage
    • As you pay off your housing loan, your home equity will increase.
    • Paying more than the minimum monthly mortgage amount can also build equity quicker. Your monthly mortgage statement is composed of interest and principal, additional payments go towards your principal. The lower the principal amount, the more equity, and home, you own.
  • Living in the Home Longer
    • It can take a few years to build equity, the chances of seeing your equity grow increase the longer you live in the home.
  • Natural Appreciation
    • Home values can increase due to the housing market or upgrades made by the homeowners.
    • Annual appreciation will also increase equity as your home value goes up and loan balance goes down.
  • Home Renovations
    • Renovating your home by remodeling, building an addition, upgrading your backyard, or adding new features are all upgrades that may increase the value of the home.
  • Maintenance
    • Making repairs and upgrades to your home can increase its value and therefore equity.
    • Repairs and upgrades can be air conditioning, heating, ventilation, a generator, or the roof.

How Can Your Equity Work for You?

Your home equity is an asset that builds wealth. Even if your financial situation has been the same, the value of your home can still grow through natural appreciation and mortgage payments. Homeowners can utilize their equity to invest, pay off debt, or fund home renovation projects.

A cash-out refinance is one of the best ways to have your home equity work for you. A cash-out refinance allows homeowners to tap into their equity and replace their previous mortgage with a new one and cash-out the difference.

A few ways homeowners best utilized their cash-out refinances:

  • Home Improvements
    • Homeowners are essentially withdrawing money out of their home to add value back into the home.
    • Home renovations or a remodel adds value to your home.
      • Renovations such as a kitchen or a bathroom have high investment returns.
  • Debt Consolidation
    • Consolidating all your debt into one payment can help simplify the repayment.
    • Using the funds from the cash-out refinance to either pay off or roll unsecured debts into your secured mortgage payments can save debt holders hundreds a month and at lower interest rates.
  • Paying-Off High Interest Debts
    • The money from the cash-out refinance can be used on high interest debts like credit cards or student loans.
    • Interest rates on credit cards can be 16% or higher while mortgage rates are in the single digits.
  • Major Life Investments
    • The funds from the cash-out refinance can also be used to pay towards college tuition.

There are countless ways to have home equity work for you in advantageous ways.

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