Home equity

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Understanding Home Equity: Building and Benefits

Whether you’re in the middle of a homebuying journey or not, you’ve likely heard the term “home equity” thrown around. And for good reason – building your home equity is one of the valuable outcomes of purchasing a home.

Looking for answers to your home equity questions? Look no further. Read below to dive deeper into what home equity is, how you can build it, and why it’s important.

What is home equity?

Let’s take a step back and define what home equity is. You can think of your home equity as the total amount of home you currently own, in comparison to how much you have yet to pay back on your mortgage. As time goes on and you make mortgage payments, your home equity grows as you gradually owe less money to your lender.

How to calculate home equity

If you’re wanting to find the home equity value, simply start with your home’s appraised value, then subtract whatever your remaining balance of your mortgage is. The result is your home equity. So, if you have a home appraised at $500,000 and an outstanding mortgage balance of $275,000, your home equity is $225,000.

Building your home equity

The following four methods are some of the more common ways to build your home’s equity:

Down payment – If you’ve yet to purchase your home, keep in mind that your down payment is your first stake in your home’s equity. If you can make a bigger down payment, then you’ll start with a higher percentage of equity.

Good mortgage paying habits – One of the steadiest ways to build your equity is to maintain regular, on-time mortgage payments. The more you can drive down your principal balance, the more you’ll gradually grow your home equity.

Extra mortgage payments – If possible, you can build your home equity at a faster rate – and pay less in interest – by making additional mortgage payments.

Update and improve your home – Depending on your home’s condition, you can improve your home's equity by expanding or updating its features. Keep in mind that this will incur extra costs that you’ll take on as the owner, with the result of driving up your home’s value. You can also explore utilizing a cash-out refinance for this, which we’ll explain in more detail below. 

The value in home equity

So, what’s the value in having good home equity? The bottom line is that the higher your home equity is, the more control you have over it as an asset. You’ll see a positive impact in the following ways:

Higher profit once you sell – Most homeowners seek to pay off their mortgage balance in full before selling their home, but that doesn’t always happen. Whether the balance is paid in full or not, your home equity can influence how much profit you see in the event of a sale. Sellers are required to pay off their mortgage in full once their home is sold, so the lower that mortgage balance is, the more profit you’ll get to keep for yourself.

Options to borrow against your equity – You can pursue a cash-out refinance and leverage your home’s equity in the form of a refinancing loan. That money can be channeled to various expenses, including home expenses, home improvements, or even other important funds like covering tuition fees. If you extend your loan term, you may pay more interest over the life of your loan.

Impact on your credit score – A cash-out refinance or a personal loan can also help you consolidate your debt, ultimately decreasing your debt-to-income ratio which is a key factor in your credit score – the lower your debt-to-income ratio, the more positive impact on your credit score.

Still have questions? Talk with a mortgage consultant to hear more about what benefits you can get from your home equity.

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Using a cash-out refinance to consolidate debt increases your mortgage debt, reduces equity, and extends the term on shorter-term debt and secures such debts with your home. The relative benefits you receive from debt consolidation will vary depending on your individual circumstances. You should consider that debt consolidation may increase the total number of monthly payments and the total amount paid over the term of the loan. To enjoy the benefits of debt consolidation, you should not carry new credit card or high interest rate debt. By refinancing your existing mortgage, your total finance charges may be higher over the life of the loan.

Before you apply, we encourage you to carefully consider whether consolidating your existing debt is the right choice for you. Consolidating multiple debts means you will have a single payment monthly, but it may not reduce or pay your debt off sooner. The payment reduction may come from a lower interest rate, a longer loan term, or a combination of both. By extending the loan term, you may pay more in interest over the life of the loan. By understanding how consolidating your debt benefits you, you will be in a better position to decide if it is the right option for you. New credit accounts are subject to application, credit qualification, and income verification.

Deposit products offered by Wells Fargo Bank, N.A. Member FDIC.

If you are a service member on active duty, an eligible spouse, partner, or dependent, or currently receiving SCRA benefits, please consult with your legal advisor prior to seeking a refinance of your existing mortgage loan. In some cases, a refinance may impact your eligibility for benefits under the Servicemembers Civil Relief Act or applicable state law.

Wells Fargo Home Mortgage is a division of Wells Fargo Bank, N.A.

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