Home equity is the difference between the market value of a home and any outstanding mortgage balance(s). A homeowner with a $200,000 property and a $150,000 mortgage balance has $50,000 in home equity.
Increasing Home Equity
There are several ways that homeowners can increase their home equity. These include:
Repaying the mortgage balance over time. Equity increases as the loan balance decreases.
Property appreciation. Real estate tends to increase in value over the long run, although it can fluctuate up and down in the short term. In the US, home appreciation averages about four percent per year.
Making home improvements. The right home improvement projects can add value to the residence while making it more comfortable, secure, attractive or energy-efficient.
For many people, the dream of buying a home cannot become a reality without a mortgage. By paying your mortgage, you are building home equity, which can be a helpful tool when making other large purchases. Home equity is the part of your home that you actually own, so the less you owe on your mortgage, the more home equity you have.
Borrowing Against Home Equity
Home equity is an asset that homeowners can borrow against when necessary. This can be done with home equity loans, cash-out refinancing or reverse mortgages. However, this important asset should not be valued lightly or depleted carelessly.
Your home equity can be very helpful when you need to make other major purchases or expensive home improvements. Borrowing against your home equity can be one of the easiest and least expensive ways to finance costs. You can also usually borrow a considerable amount when you borrow against your home equity - usually up to 80 percent. The interest rates on home equity borrowing can be quite competitive and typically the amount you pay in interest is tax deductible.
But, that doesn’t necessarily mean that you should use your home equity for just any purchase. Some experts only recommend borrowing against your home equity to finance home improvements, major purchases, college expenses or for consolidation of high-interest debt. Using your home equity to finance improvements and renovations can prove to be an especially smart move because new and modern home features can actually increase the value of your home.
Affected by Location
Your home equity also has to do with the market value of your home. If your home is near excellent schools or has other attractive features, the value of your home could increase, which in turn increases your home equity.