Home equity is a term you may have heard, and it has increased in popularity over the past several years. For most people, their homes are the single greatest asset they will ever own, and so homeowners and those looking to buy a home may wonder what does home equity really mean?
In this blog, we’ll not only break down what home equity means but also highlight ways in which you can access it and help you invest further.
What is home equity?
When a homeowner purchases a property, they are effectively buying it on credit. The bank agrees to lend them a certain amount of money, and the property itself acts as security for that loan.
As long as the homeowner pays their mortgage on time and doesn’t default on the contract, they can use the property as collateral to access further funds. This is called “equity”.
When people talk about home equity, they’re usually referring to the value of your home above and beyond its mortgage. In simple terms, home equity is the value of your home minus any mortgages or loans you have on the property.
Remember, your equity can increase or decrease depending on the market value of your property. So, if you’ve paid down a significant amount of your mortgage, or if your property has increased in value since it was purchased, then you’ll have a higher equity position in it. And if the value of your property has decreased, then you’ll find that the equity in it is lower than the purchase price.
Home equity has been growing steadily in recent years, as the real estate market has been on a steady rise. The increase in property values has given homeowners additional wealth that they can use for a variety of purposes.
Home equity is one of the most powerful tools at your disposal for investing -and growing-wealth. It can give you a financial boost in a few different ways that we will discuss further in the blog.
How can you calculate your equity?
Equity is essentially the amount of credit you can access based on your current loan status and the overall value of your property. The amount of equity available in your property is dependent on how much you owe on your existing mortgage and what the value of your home is worth at this point in time.
If you’ve never taken a look at the market value of your property, it’s time to get familiar with what your home is worth. This can be done a number of ways. You can get in touch with your broker and ask them for guidance on valuation [this we can support you with at GA Finance], or you can use an online tool to estimate how much equity you may have available. Once you have an idea of what your home is worth, you’ll be able to find out how much equity that number represents.
You can determine your equity by seeking the services via your broker to understand your lending capacity. If you are in a position where you can lend more than the current value of your mortgage, then you have available equity. Independent property valuation agents can ensure that you are accurately appraised for all forms of lending purposes
How can you access your equity?
Accessing equity in your existing home generally means refinancing your existing loan, and increasing the amount of money you have borrowed in order to free up additional funds. When the value of your property increases over time, lenders take into consideration the increased value of the property and will often lend you money against that property. This is called collateral.
Refinancing this way may also give you an additional advantage by refinancing your existing loan and taking advantage of a lower interest rate. When you refinance your existing loan to access equity, your old loan is paid out and you get access to the newly available funds, either as cash or a line of credit. You can then use the available funds to invest further into property, buy shares on the share market.
In addition to using credit to invest, you can use your equity to make improvements on your existing property, such as performing renovations or building an extension. Over the long term, this can give you more return on investment by further increasing the value of your property.
Refinancing and accessing equity can be a great way to free up funds and could help you reach your goals. If you want advice or need to discuss your situation, speak to one of our finance experts at GA Finance today.