What is Equity (and How Do I Use It)?
A lot of people are still a bit confused about the term ‘equity,’ it is a really simple concept that can help you keep making smart investments, writes Dom Cassisi from Funding Options.
How Equity Works
Equity is the difference between your home’s current market value and the amount left on your loan debt.
Another way to look at it is this: if you could sell your home off today and use the money to pay back the bank, that money would roughly be the amount of equity you have.
That figure of how much equity you have will change along with the fluctuating market value of your home. And you may not have as much equity as you might think. Your bank determines how much of your equity is ‘usable.’
You have to remember that tapping into your equity will increase your mortgage. It’s still the bank’s money so you will eventually have to pay it back, at some point. Don’t try to access your equity if you have no other financial fallback.
Equity can be a valuable tool. It represents a pool of funds that you have access to, when needed. Many people like to put their equity towards investing in other properties. As long as you’re balanced and diligent and plan carefully you could successfully do the same.
Ways to Use Your Equity
As mentioned above, equity can be used as security to invest in a property. Some people will also use equity for other investments, holidays or buy a new car.
One option is to access your equity is to simply remove the amount in a lump sum. This may stick you with high interest fees, however. If you choose to do this, then you need to be sure the investment justifies the fees.
Many people use their equity like a giant credit card. This way, they only have to pay the interest rate on the amount they use, just as with any other line of credit.
Increase Your Equity
Your equity grows as the value of your home increases and/or as you pay off more of your loan. Making more or bigger loan payments is one way to reduce your debt. If it’s possible to set up an offset account, this would reduce the amount that you have to pay interest on.
There’s always the option of refinancing your mortgage so that it more accurately reflects your home’s current value. While this can unlock some more equity, you may still run up some fees for refinancing. You’ll need advice from an experienced mortgage broker about this.
You could try an aggressive approach that tackles your equity on both ends: pay off as much of your loan as possible and make improvements to your home that raises its value.
When you go to determine how much your home is worth, you’ll need a licenced valuer to look at it. This is because the estimated market value won’t always match the actual value. The actual value is what your bank cares about.
Renovating or improving your home during times of poor economic growth is a good way to boost its value. Just make sure that the improvements you make are both compatible with market demand and council-approved. Otherwise, they may count against you.
Equity can essentially be a wealth-building positive feedback cycle: the equity can be used to boost your home’s value. This, in turn, increases your home’s equity, and on it goes. Using the equity in your home is just one alternative to lending.
Clearly, there are a lot of ways you can use your equity.
Does your home have any that you can take advantage of?
Get some help in understanding your home’s equity and your options by contacting the leading mortgage brokers at Funding Options. Contact us for a free discussion with no obligations.
– Dom Cassisi, Managing Director