You may have heard it said on TV or by friends who work in real estate: there’s money in your home. That sounds exciting, but how do you find it? Before you start looking under couch cushions or digging in the backyard, let’s talk about a word some of you may not be terribly familiar with: equity. For those of you who don’t know, equity is an asset related to the interest in your home, and it can do wonders for you if you know how to turn it to your advantage. Sound a little mysterious? Don’t worry: by learning some basic information about real estate and finances, you’ll be able to answer these questions with ease.
What Does Equity Represent?
Equity is the value of your home that you’ve currently paid for—in other words, the portion of your home that belongs to you. To understand how to work with your home equity, you’ll first need to know what the value of the equity in your home is. The equation you’ll use to determine this is simple: the market value of your home minus the amount of money that you still owe on it. However, finding these numbers can be a bit of a challenge.
Determining Your Home Equity
First, you’ll need to get an idea of what the current market value of your home is. However, it isn’t as easy as simply looking through your receipts—we’re not talking about what your home was worth when you purchased it; we’re talking about what it’s worth right now. Finding the exact current value of a home can be difficult to do without the help of an appraiser, but you can put yourself in the vicinity of those figures by doing some research. Dig up as much information as you can on similar homes in your area that are currently on the market, or speak with a local real estate agent and ask them for some numbers on recently closed deals. Just make sure the homes you’re looking at are similar enough to your own that their prices will likely be comparable.
Once you’ve found the current market value of your home, simply subtract any money you still owe on it to estimate the value of your current home equity. So, now that you know roughly how much equity there is in your home, what do you do with it? If you need money, the answer is to borrow—after all, the equity is yours to borrow against. The question for most homeowners is how to choose a borrowing strategy that properly aligns with their needs. There are three common ways:
Home Equity Loans
A Home Equity Loan is a very simple concept: it’s a certain amount of money that you borrow from the existing equity in your home. The conditions of a home equity loan are quite rigid: the loan comes with a predetermined amount of time to pay it off, and you’ll make the same payment every month with a fixed rate of interest. These conditions make home equity loans easy to predict but a bit rigid. If you have a clear picture of your finances and aren’t expecting your circumstances to change for the foreseeable future, home equity loans can work well for you. The caveat is that you won’t be able to borrow more than the initial amount you took out without rearranging everything.
Home Equity Lines of Credit
Home equity lines of credit are more flexible than home equity loans, which means that borrowers tend to need more responsibility to use them. The reason for this is that home equity lines of credit function according to similar rules as a credit card: you borrow as much as you want up to a certain limit, and if you keep paying the line of credit down you can repeat the process repeatedly—until the length of the loan expires. If you can pay down the entire line of credit before it expires per se, this can be useful—but if you don’t trust yourself or your luck, maybe think twice.
Reverse Mortgages
Reverse mortgages offer an alternative to home equity loans and lines of credit that make them especially useful for people who need to borrow money over long periods of time. Reverse mortgages are only available to older borrowers, but because of this, they offer an easy way for seniors to use home equity to pay for retirement. Reverse mortgages require no payments until the home passes out of the hands of the last surviving owner.
For more information on the pros and cons of reverse mortgages, visit https://reverse.mortgage/advantages-disadvantages.
Borrowing against home equity is not something to be taken lightly, and there are many factors you should consider before going into debt. However, there are plenty of excellent reasons to borrow from your home equity if you know what you’re doing, and hopefully, now you understand enough to have some ideas about which of these strategies is right for you.
Kidal Delonix is a contributor to Mr. Hoffman's blog. The views and opinions are entirely his/her own and may not reflect Mr Hoffman's views.
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