What is Home Equity and How Can You Use It?

Your home is more than just a place to live — it’s also a valuable asset that can provide financial flexibility. As you pay down your mortgage and your property value appreciates, you build equity. But what exactly is home equity, and how can you leverage it to achieve your goals? 

What is Home Equity?

Let’s break it down. Your home’s equity is a portion of its value that you actually own. This is the difference between the home’s current market value and the balance you haven’t paid yet on your mortgage.  

Let’s say your home is worth $350,000, and you still owe $200,000 on your mortgage. In this scenario, your home equity would be $150,000. 

How to Calculate Your Home Equity

Now let’s figure out what your home’s equity actually is:  

  1. Get a current estimate of your home’s market value. You can use online tools or consult a local real estate agent for a comparative market analysis. 
  1. Find your mortgage balance on your most recent statement or by contacting your lender. 
  1. Subtract the balance you currently owe on your mortgage from your home’s estimated value. 

The result is your home’s equity. This number can fluctuate quickly based on changes in the market and your mortgage balance so if you haven’t checked your home equity in a while, you might want to run the numbers again.  

How to Use Home Equity

So, you’ve built up some equity in your home — now what? You have several options for tapping into this valuable resource: 

1. Home improvements: Use your equity to finance renovations that can increase your home’s value and enhance your living space. 

2. Debt consolidation: If you have high-interest debt, such as credit card balances, you can use your home equity to pay it off and potentially save on interest. 

3. Education expenses: Tap into your equity to fund college tuition for yourself or your children. 

4. Emergency fund: Life can throw unexpected curveballs. Your home equity can provide a safety net for unplanned expenses. 

Using The Equity in Your Home

There are three primary ways to access your home equity: 

1. Home Equity Loan

A home equity loan allows you to borrow a lump sum against your equity, typically with a fixed interest rate and repayment term. This option can be ideal for one-time expenses, such as a major home renovation. 

2. Home Equity Line of Credit

A home equity line of credit (HELOC) functions more like a credit card. You can borrow up to a certain limit, make payments, and borrow again as needed. HELOCs usually have variable interest rates and can be useful for ongoing expenses or projects. 

3. Cash-Out Refinance

With a cash-out refinance, you replace your existing mortgage with a new, larger loan and receive the difference in cash. This option can be advantageous if you can secure a lower interest rate than your current mortgage. 

How to Increase Equity in Your Home?

This is a great question because we could all use a little more equity! To do this, you’ll need to increase your down payment for immediate equity, avoid interest only loans, or increase your mortgage payment.  

It’s simple when you think of it like this. The more you pay and the faster you pay down your mortgage balance, the more equity you’re creating.  

If you’re then taking that money and pouring it back into your home by renovating or updating something, you’re also creating more equity so it’s a win-win.  

Pros and Cons of Using Equity in Your Home

Before tapping into your home equity, weigh the potential benefits and drawbacks: 

Pros: 

  • Lower interest rates compared to other types of loans 
  • Potential tax deductions on interest paid 
  • Flexibility to use funds for various purposes 

Cons: 

  • Putting your home at risk if you can’t make payments 
  • Possible fees and closing costs 
  • Reduced equity in your home 

Final Thoughts

Your home equity is a powerful tool that can help you achieve your financial goals — but it’s not a decision to be made lightly. Before borrowing against your equity, assess your financial situation, consider your options, and determine if the benefits outweigh the risks. 

Remember, your home is not just a piggy bank — it’s also a place to build memories and a sense of security. Now that you have an answer to the question “what is home equity,” you can start asking better questions like.  

  • What types of improvements should we make?  
  • Do we have money for that kitchen renovation?  
  • Or… is it time to finally get that new roof?  

If you’re serious about the roof, call today for a free roofing estimate!