What is Home Equity and How Do You Use It?

What is home equity? Home equity is the current market value of your home minus what you owe on your mortgage. In other words, home equity is the portion of your property that you truly own. For example, if your home is worth $500,000, and you owe $350,000 on the mortgage, your equity is $150,000. So therefore, you are increasing your equity when you are paying off your loan.

Your home equity can also increase without you doing anything. When your home gains value because of a healthy real estate market your home’s equity increases. You can also build equity on your home by remodeling or improving certain features of the house such as a new bathroom or adding a pool.

Home Equity is an asset. There are several different ways you can choose to use this asset. One way to use your equity is you can buy your next home with it. Most people don’t live in the same house forever so when you sell your current house you can use that money to help pay for your new home. If you haven’t completely paid of your mortgage you won’t get all the money you sold your house for, but you will get to use your equity.

Another way to use this asset is to borrow against the equity. This means you can get cash with a home equity loan to use it on whatever you’d like. You will receive all of the money at once and have to repay the loan with flat monthly payments. People take out these types of loans to pay for school, make home improvements, or even for an emergency fund.

Another common use of home equity is to fund retirement using a reverse mortgage for individuals that are 62 years of age or older. Reverse mortgage loans provide income to retirees and don’t require monthly payments as long as property insurance, taxes and HOA (if you have one) are maintained and up to date.

Home equity takes time to build, but the wait is very much worth it. Home equity can be an important asset for you and your future.