Whether you’re already a homeowner or you’re soon to become one, the word “equity” is one that you’re likely to hear over and over again. “Building equity,” “tapping into equity,” and so forth — it is a word that is almost synonymous with home ownership. You’ll even find that banks and other financial institutions, such as Resource One Credit Union, offer a special type of loan called a “home equity loan.” What is this all about, what does it mean for you, and what can you do with equity once you have it?
Understanding Equity: What Is It?
Equity itself is a simple concept: it is the current market value of the home you own minus the amount of money you still owe on your mortgage. Put another way, the amount of equity you have in the property starts at a level roughly equivalent with the down payment you made to secure the property. Over time, your equity may grow or decrease based on factors beyond your mortgage payments. In general, though, a good rule to remember is that equity equals appraised value minus loans.
How Can You Build Equity in Your Home?
“Building equity” is a common phrase, and a commonly misunderstood one, too. Many claim that you can build equity rapidly, transforming your home into a “get rich quick” vehicle for building wealth. However, there are only two factors which tend to build equity consistently: time and personal consistency. Barring unforeseen economic disruptions, homes typically grow in value over time. Such appreciation tilts the equation away from how much you owe on your mortgage, giving you access to more equity.
In terms of personal consistency, making regular mortgage payments on time reduces the balance of your loan and consequentially increases the personal stake you hold in the property. The only way to build equity faster, therefore, is to make larger or more frequent payments on your mortgage. What about renovations, however?
Improving the property may indeed increase its market value — however, you should be careful. The expensive nature of many home improvements means that you rarely receive 100% of your expense as an increase in value. Make the improvements you want and which make sense, and otherwise take good care of your property. It will build you more equity than a directed effort.
Every homeowner’s dream is unlocking 100% of their equity — but in the meantime, the equity you do have is more than just a theoretical number. It is an asset of genuine value, and it is a tool you may use for many things.
Unlocking the Equity in Your Home When You Need It Most
Understanding that financial institutions see your equity as a valuable asset makes it simpler to understand why products such as home equity loans exist. These financial instruments allow you to tap into the value of your stake in the property by using it as collateral to secure a loan. For this reason, you’ll typically hear home equity loans referred to as “second mortgages.” When you open a home equity loan, you will still need to make your regular mortgage payments while also meeting the obligations of your new loan’s terms. Home equity loans are an excellent way to receive funds to meet urgent or very large expenses quickly. In some cases, you may even receive more flexible terms to use the loan to improve your property.
There are other types of loans that rely on how much equity you have, including a “cash-out refinance” and a “home equity line of credit,” also known as a HELOC. These are both unique from one another and the basic home equity loan. In a cash-out refinance, you replace your existing mortgage with a brand new one for the same value plus a certain amount of money you wish to borrow in cash. An HELOC allows you to draw upon your equity as needed, similar to a credit card.
Why Should You Refinance?
Refinancing your mortgage is a good way to pay for certain expenses while also taking advantage of some unique benefits. For example, many homeowners choose to refinance when it becomes clear they can lock in a lower rate and save more money in payments over time. In other cases, sudden debt or medical expenses may necessitate a need for funds urgently. If you can qualify for a lower rate, a cash-out refinance may be better in such a situation than a regular home equity loan. Speaking with a friendly loan officer, such as those at Resource One Credit Union, may help you determine which path is right for your finances.
Find an Excellent Home Equity Loan from Resource One Credit Union
Whether you have a need to refinance or there is a significant expense you must pay for, the equity you build in a property as a homeowner is a valuable financial resource. Although it is typically unseen and you can’t easily look at it like you can with a bank account, your equity is an important part of your personal worth and a tool to use when necessary. At Resource One Credit Union, we make it simple and easy to tap into your equity with a range of financial products. From basic home equity loans (aka a second mortgage) to HELOCs and other options, we’re ready to help you secure the funds you need today. Contact us to find out more.