Homeowners refer to their hone equity as wealth, but what does it have to do with building your net worth? What is home equity and how does it contribute to your wealth?
What is Home Equity?
Home equity is the value that you have built up in your home. If you still have some mortgage left to pay, it is the current market value of your home minus all the money you still owe.
Because of the above, your home equity is very much like a type of bond because it locks up your money with your property. There are ways to tap your home equity; however, note that the longer you let it sit (without real estate depreciation), the more it can create more wealth for you as your paid for percentage of your home increases.
Building home equity is a slow process unless there is a sudden increase of real estate prices in your area because of housing demand or some other factor. Note too that it can suddenly fall if home in your area lose their marketability. This is why it would be wise to be picky when it comes to choosing a property’s location.
Significance of Your Home Equity
Your home equity can be tapped once you meet the requirements set by lending institutions, companies, or private lenders. It serves as a financial resource that grows and increases value over time as the homeowner continues to pay mortgage payments.
In a way, you can look at home equity as some sort of a forced savings account. This is because building equity on a home isn’t like spending money on material things like cars that lose value while you are still paying for it. If your property is in a good location, then you can build up quite a lot of wealth in home equity.
How to Grow Your Home Equity
Growing your wealth through home equity takes time. The longer you stay in your home and keep up to date with mortgage payments, the bigger your home equity will be (unless you live in a housing bubble). Once your mortgage has been paid for, your equity continues to grow with the property’s value.
Using Your Home Equity
You can tap your equity wealth by applying for a home equity loan. By doing so, you will be borrowing money against the value you’ve built up. You can choose to go for a home equity loan that will allow you to get money in a lump sum, or choose a HELOC or a home equity line of credit. A HELOC will let you take out as much or as little as you wish within set limits.
Note that a HELOC and a home equity loan are far from the same although they might sound similar. Both have pros and cons that should be weighed carefully depending on your needs and means.