So…what is home equity?
It’s the percentage of your home that you actually own. If you’ve taken out a mortgage on your home, your equity excludes any lender interest in the property. While the most common way to increase home equity is simply paying down your mortgage, you can also grow your equity by improving your home’s overall value. Two of the easiest ways to do so are living in an area with rising property values and undertaking home improvements that will increase resale value. Now that we’ve got the basics down, we can move on to the fun stuff: how to use your home equity to your advantage.
Home equity is a great way to leverage your wealth. An easy way to do so is through a home equity loan, or more commonly known as second mortgages. A home loan pays out the funds from the loan in one lump sum, making you, the homeowner, responsible for making regular, monthly repayments. A home equity loan borrows against the equity you’ve built up already. The amount that you’re allowed to borrow thus depends on how much progress you’ve made repaying your mortgage. Maintaining a 15%-20% ownership stake in your home is a pretty safe spot to be. Borrowing against your home equity means you’re borrowing at an exponentially lower interest rate than a credit card or personal loan would demand, making it an option worth considering for life’s bigger expenses.
Another leveraging option is a home equity line of credit, which differs from a home equity loan in its disbursement and fee structure. Here, the loan is divided into two separate pay periods: the draw period and the repayment period. During the draw period, you’ll probably only have to make payments on the interests accrued by your purchases, much like a credit card. After the indicated period of time passes, you’ll enter the repayment period and no longer be able to draw funding from your home equity. This also means you’ll have to start making payments on the principal and interest of what you’ve borrowed.
You may also choose a cash-out refinance, meaning you take out a new loan to pay off and replace your old one. This means that you’re borrowing more than you owe and are receiving the difference in funds that you can use at your discretion. However, the amount you can borrow is determined by how much equity you have in your home. Typically, you can borrow up to 90% of your home’s value.
Traditionally, many make use of their added home equity by selling their houses and purchasing bigger ones. Selling your home means that you’ll likely have enough proceeds from the sale to pay off the remainder of that home’s mortgage. Potentially, you may also be left with some profit that can be used to buy that bigger home and leverage your home equity even further than before.
At HoneyTree Grow, we make it simple by doing all of the work for you. Our team consists of independently successful real estate investors who have been focused on building commercial real estate portfolios for over five years. Contact us to learn more!