Owning your own home has many advantages, especially the longer you own it. The longer you make payments on your own home, the more equity you build that can be leveraged later on in life. Whether you want to use that money to pay down debt, or as a down payment for a second home, when managed right, the money you invest in your property can benefit you in more ways than one.
What is home equity?
Put simply, equity is the difference between what your home is worth and what you owe to the bank. For example, if your house is worth $400,000 and you have $150,000 left to pay on your mortgage, you have $250,000 in home equity.
The amount of equity in your home can increase in two ways: first, as you pay down your mortgage. Repaying your loan transfers more ownership of your home from the bank to you. Additionally, if the value of your home increases, you gain more equity, as your home is worth more, but the amount you owe to your mortgage lender does not rise.
Conversely, should your home ever depreciate, you could potentially lose equity in it even while paying down your mortgage. However, there are various ways to avoid this, where both your mortgage lender and real estate agent can help you understand.
What does it mean to borrow against your home's equity?
If you’ve ever heard someone say they’ve taken out a “second mortgage” on their home, odds are they’ve taken out some type of equity loan. This means they’ve borrowed against the equity built in their home. The two ways to borrow against your home's equity are either through a home equity loan, or a home equity line of credit (also known as a HELOC).
With a home equity loan, you can borrow money using your house as collateral. Homeowners who go this route usually will get a lump-sum payment for things like down payments or debt consolidation. The loan will be repaid with a fixed interest rate over a pre-determined time.
A HELOC is line of credit as opposed to a loan. With a HELOC, owners will get a predetermined limit on how much can be drawn from the line. After a certain amount of time, owners begin to repay the loan, including interest on what was borrowed. At the end of a HELOC, borrowers won’t be able to borrow against their home and will have to pay the principal and accrued interest.
How can you leverage your home’s equity?
There are many ways to use your home's equity to your advantage. If you’re in the market for a new boat, second home, or even a new car, you may access the best interest rates by getting a home equity loan or a HELOC, and using that money as a sizeable down payment for any of these investments. Many people also decide to leverage their home’s equity to support home renovations, which could potentially increase the value of the home when complete.
If your child is going to college, drawing from your home's equity is a great way to pay down their tuition. A home equity loan or HELOC are also great ways to consolidate your own debt and help simplify your budget.
When done strategically, there are many benefits to using the equity you’ve built in your home to support large financial decisions. The best way to get started is reaching out to a Penrith Mortgage Consultant! Our professional lending team not only helps you find the right financing solution for purchasing a home, but they also specialize in helping you manage your mortgage to achieve your personal financial goals.