Home Equity
Effy sits down with Barry from Cazle Mortgage to share a personal story.
What is equity?
When a mortgage is taken out, the down payment is the first piece of equity that you as the owner have. As you pay down your mortgage, those payments are now considered “equity”. If you purchase a $300,000 house and put $15,000 (5%) down as a down payment, then you would have $15,000 in equity.
Equity is based on the appraised value of your home. The equity you have is equal to how much an appraiser believes your home is worth, minus the balance of your loan. For example, let’s say a few years later, your home appraises for $300,000 because the housing market is hot. If you’d paid the loan down to $150,000, you’d have $150,000 in home equity.
Another way to build equity is to add square footage to the house like finishing a basement or building an addition. Once these improvements are completed, an appraisal must be called out to appraise the property, which will then add equity to the house.
How can equity be used:
A way some owners use their equity is by taking out a HELOC (Home Equity Line Of Credit). A HELOC is similar to a credit card in that you will have a defined amount of money you can borrow and pay back. You are able to take money as you need it and only pay interest on what you take. Often, HELOCs begin at a lower interest rate however the rate is variable so it may rise or fall. This also means that your monthly payment can rise or fall, too. A person might take out a HELOC to have on hand for emergency expenses.
Another common way people use home equity is to take out a Home Equity Loan. A home equity loan has a fixed rate, meaning your monthly payment remains the same. Keep in mind that this is an additional monthly payment with your mortgage. Taking out a home equity loan is a tactic some sellers use to do home renovations to raise the market value of their home and then payback the loan upon settlement. There are other circumstances a person may take out a home equity loan such as business expenses, education expenses, wedding expenses, or debt consolidation.