What is Home Equity?
Home equity refers to a homeowner’s ownership share, representing the difference between the property’s current market value and any outstanding mortgages or liens. It is a measure of the wealth and asset worth of the homeowner. Home equity grows when homeowners pay off their mortgages or the value of their house rises.
Home equity may be obtained via various methods, such as home equity lines of credit (HELOC), home equity loans, home equity investments, and cash-out refinancing. These solutions enable homeowners to access their home equity for financial needs, but it is critical to approach such alternatives properly and understand the related terms and hazards.
What is the Home Equity Formula?
The formula for calculating home equity is simple:
Home Equity = Current Market Value of the Home – Outstanding Mortgage Balance
Two pieces of information are required to calculate home equity:
1. The home’s current market value
This refers to your property’s estimated or evaluated worth in the current real estate market. This information may be obtained via a professional evaluation, internet valuation tools, or comparing recent sales prices of comparable houses in your region.
2. Unpaid Mortgage Balance
This is the amount you still owe on your home loan. It comprises the principal amount borrowed, interest accrued, and extra fees or levies. This information may be found on your mortgage statement or by calling your mortgage provider.
To determine your home equity, remove the existing mortgage debt from the existing market value of your property. The resultant figure shows your ownership or worth of your property.
How do you use home equity?
​​Home equity may be used to achieve financial objectives or satisfy particular requirements. Here are some examples of typical strategies to leverage home equity:
1. Renovations or Home Improvements
Many homeowners utilize their home equity to pay for house upgrades or enhancements. This may boost the value and livability of the house while providing tax advantages on the interest paid.
2. Expenses for Education
Home equity may be utilized to pay for educational expenses such as tuition for oneself or family members. It may have cheaper interest rates than other forms of loans.
3. Investing in Real Estate
House equity may be utilized to purchase an investment property or a second house. This enables homeowners to leverage their current property to develop a real estate portfolio.
4. Retirement Preparation
Some homeowners use their home equity to supplement their retirement income. Downsizing to a smaller, more affordable house or using a reverse mortgage to turn a part of the equity into additional income during retirement are two options.
