What is home equity and how can you use it?
03/12/2024
Home equity is a great way to build wealth and tap into lower interest rate loans.
What is home equity?
The equity in your home is one of the major financial benefits of owning a home. When you buy a home, the building of home equity begins. There are three things that will increase your equity.
- Increasing your down payment.
- Decreasing your mortgage by making payments.
- The value of your home increases.
You can start with equity in your home as soon as you buy the house with a good down payment. Saving a little longer to get the best down payment possible gives you a head start to building home equity, decreases the amount owed on your mortgage, and decreases interest paid over the life of the mortgage.
The less you owe on your mortgage the more equity you will have. If you have been paying on your mortgage for a few years, it is likely you have a great start to building your home’s equity.
The third factor is the current market value of your home. This is determined by estimating how much someone would be willing to pay for your house in today’s market. Where your home is located, size and condition, school district, the amount similar houses are selling for, and other market conditions all contribute to the current value of your home. Investing in home improvements may also increase the value, especially if your home is in a good location.
Most properties’ values increase over time. If you buy and sell the house quickly without any improvements to increase the value, there may not be much equity gained, leaving little to no financial benefit.
To discover what your home equity is try this simple equation:
Home Equity = Current Market Value of Home – Amount Owed on Mortgage
Home Equity Loans
When you have equity in your home, you can use a portion of it to secure a loan at a lower interest rate than a regular personal loan or credit card. A traditional home equity loan allows you to borrow once to spread out a large expense.
Home Equity Lines of Credit (HELOC)
Similar to Home Equity Loans, a HELOC leverages the home’s equity to secure credit at a lower interest rate. However, instead of a regular structured loan with a defined term, a HELOC allows you to continue tapping into your home’s equity whenever you deem it necessary or most beneficial. As the line balance is paid down, that available equity can be reused.
What can I use a Home Equity Loan or Line of Credit for?
There are no specifications for what you can or cannot use a home equity loan or HELOC for.
Some common uses for home equity loans and lines of credit:
- Home remodel projects
- Education expenses
- Major life events
- Debt consolidation
- And more!
Are you ready to tap into your home’s equity? Members with a MembersAlliance home equity line of credit saved $210 per year compared to other area banks.* Save more and get personalized service with a Home Loan Specialist whether you stop by a branch or complete an application online from the comfort of your home. Visit our home equity page to get started.
*Annual Savings received from 2023 CUNA Economic and Statistic Membership Benefit Report.