A home equity loan is ideal for arranging funds by tapping into your home's worth. The value of a home equity loan is the difference between the remaining mortgage balance and the home's value. The value of equity depends mainly on how steadily you pay down the mortgage and your area's current real estate values. If you visit this link, you can even read more about how to draw on your home equity if you’re currently unemployed.
Money from home equity is generally used for extensions, home renovations, and improvements. Additionally, it's used to buy a new asset such as a car, cover school expenses of children, debt consolidation, as a capital for running the business, etc.
If you need a lump sum of money for your expenses, then a home equity loan is a perfect option.
A home equity loan allows individuals to borrow the difference between 80% to 85% of their home's value and mortgage balance they owe. Let us understand this using a simple example:
You purchase a house valuing $200,000 with a 10% down payment, which would be $20,000. Then, your lender will provide you with a mortgage loan of $180,000. If the sales price of your home is $200,000, the value of equity will be $20,000, or $200,000 minus $180,000.
Now let's assume that you have been paying your mortgage installments on time for two years. The mortgage balance remains $170,000, and the home's value increases to $210,000. The equity value will also jump to $40,000 ($210,000 - $170,000).
However, it is to be noted that if the property's value is depreciated, this home value concept could work against the homeowner. For example - the mortgage loan balance value is $170,000, and the home value has been reduced to $195,000. The equity value will be $25,000 ($195,000 - $170,000).
To sum up, the equity value primarily depends on the home value. A real estate expert can best help determine the exact market value of your home. If you want an approximate idea, you can make a comparison based on the home sales rate in your area.
However, the value estimated through this method isn't always accurate. Alternatively, you may use a home equity loan online calculator to get the exact home value.
Here are some ways to increase your available home equity:
It is one of the fastest ways to increase your home's equity value. The more significant is the down payment, the higher the equity. Let's understand this using a simple example.
Say you purchase a home valuing around $180,000. You pay $5,000 as a down payment, the mortgage of your home will be $175,000. As a result, the amount of equity will be $5,000. Similarly, if you make the down payment of $20,000, the mortgage will be $160,000 of a home valuing $180,000. But equity of $20,000 is comparatively more.
A part of the mortgage payment goes towards the home loan's principal balance, and the rest goes towards paying homeowners insurance, interest, and property taxes.
Initially, a small amount of the mortgage payments goes towards the principal balance, while a significant chunk goes towards mortgage interest. The good part is that the higher the mortgage installment's value, the more money goes into clearing the principal balance, which means higher equity. Note that some mortgage loans may not work this way.
Let's say if you opt for a non-amortizing or an interest-only mortgage, then the installment will not build equity as the principal balance isn't reduced. The installments will go into paying insurance, interest, and property taxes. A lump sum will have to be paid to clear some part of the principal balance.
Hence, an ideal way to build equity is by paying more than the required installment amount every month. Making an extra payment on a yearly, biweekly, or monthly basis helps chip away the principal balance of the home loan. If not much, you can consider paying at least $100 every month to reduce the mortgage's principal balance and increase your home equity quickly.
Home equity increases with an increase in the home value. No specific period can be guaranteed for the rise in the home value, but the odds may level up if homeowners stay in their homes for a good number of years. It is advised to stay in the same home for at least five years. A rise in the value means more equity.
Renovation is another excellent way to increase your home's value. You may consider adding an extra room, a master bedroom, or renovating the old kitchen. Alternatively, you may invest in landscaping to give a new look to your home. All these solutions help in boosting home value.
Borrowing money against home equity is one of the safest ways of arranging funds. The interest rates on such loans are mostly lower than any other type of loan available in the market. However, not all lenders facilitate the borrowers with home equity loan options. That isn't a significant problem, though. Make sure to read all the terms and conditions beforehand to know what you are getting into.