Welcome to Spring! The rumors are true - Spring is almost here and it's high time for some news you can use about using home equity to your advantage so that you can take full advantage of all that property ownership can offer!
So what is equity and why are people so excited about it? Home equity, or "equity" for short, reprsents the value one has paid into their property just by paying the monthly mortgage. As your share of ownership increases and the lender's share decreases the value of the ownership in the property is called equity. Lenders analyze equity in terms of a ratio, which is the value of hte property in the market, crossed against the value of the loans out against it. This ratio is known as "LTV" or "loan to value". This gap is called "equity." For example, if you purchase a property for for $100,000 and you owe $80,000 on the property, then you have $20,000 in equity. That value can come from your making payments, just from the property having a value over your loan balance, or from increases in neighboring properties that affect value. That is one reason why people pay attention to what the house down the street sold for! Not because they are nosy - but because neighboring home values can affect your value, and thus, increase or decrease equity! So... how to use it? There are some things you should know.
Home Equity: How to Use It
A refinance pays off your current mortgage and gives you cash based on your equity. This is a great way to lower or lock in your mortgage interest rate and get large sums of money – $30,000 or more. You may have to pay closing costs; discount points; appraisal fees; loan processing fees; document fees; origination fees; funding fees; loan broker fees; and miscellaneous other fees.
A home equity loan, a.k.a. a second mortgage, is good for homeowners who don’t need quite as much cash and whose mortgage interest rate is already competitive. The term is usually five to 15 years. These installment loans are paid out in one lump sum, so they’re good for repaying credit card debt or remodeling projects, even buying a new vehicle.
A home equity line of credit works like a credit card – you agree to a pre-set limit and then borrow as you need to, or in the event of an emergency, usually for up to 10 years. These are good for debt consolidation, major home improvements, college tuition and expenses, and unexpected expenses. Make sure there’s a cap on your variable interest rate. A home equity line of credit shouldn’t be used for frivolous luxury items, unless it’s a one-time purchase and not a pattern of behavior.
As you may know, having a relationship with a lender - say the one you used to purchase the property - is a great idea, so that you have an easy contact person to reach out to when you want to examine your equity position. One thing to keep in mind, is that you can use equity for a lot of things. Here's a list
- Paying off higher interest debt - or consolidating debt
- Construction projects / updates
- Purchasing another property
- Starting a business
- and more!
The different uses for equity are as varied as the people using it. One simple thing to remember is that using equity can have two effects - either it adds another bill to be paid and managed, or it reduces your debt ratio. I always recommend you be aware of how much equity you have in your property and use that power to improve your financial picture!
As always, if you have questions, I'd love to be your real estate go-to-Guru! Happy springtime! And if you are looking to buy, sell, rent, invest or develop - I am here to provide guidance and support!
- Alisa Levin, JD, LLM