Home equity

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.

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.

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.

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. 

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.