For many people, the most valuable asset they own is their home. Technically however, since the bank supplied the money to buy the house, the bank has a right to it. Your ownership increases as you build home equity by paying down the principal balance of your mortgage loan.
What is Home Equity?
On the most basic level, home equity represents your ownership in the home. It is the difference between the market value of your home and the balance remaining on your mortgage loan. If the home increases in value, your home equity increases as well.
For Example: If you buy a home for $190,000 and make a $10,000 down payment, your mortgage balance will be $180,000. But you only have $10,000 of equity in your home. However, as you make mortgage payments, you will begin to pay down the principal loan amount. Additionally, your home may appreciate in value (to $200,000) after a few years. With the payments you have made towards principal, you may have $150,000 left on your mortgage. Your monthly payments, coupled with the increase in your home’s value, now means that you have $50,000 in home equity.
Using Your Home Equity
When you have a good amount of ownership in your home, you may be able to use that equity for other purposes. It is possible to get a home equity loan (HEL) or a home equity line of credit (HELOC). These types of loans are often referred to as “second mortgages” and they are secured with the equity you’ve built up in your home. It is also possible to get cash using your home equity, which can be used to make home improvements, pay off debt, or even go on vacation.
It is important to carefully consider your options before using home equity financing. If you are unable to make regular payments on your home equity loan, you could lose your house to foreclosure.
Another thing to consider is that home values do not always rise. So if you have a home equity loan and your home value falls, you could owe more on your home than it is worth. While this does not always lead to foreclosure, being underwater on your mortgage can be very problematic.
Building ownership in your home is important. The more home equity you build, the more secure you will be, and the less likely you are to lose your home to foreclosure. Home equity also gives you more options for refinancing, and helps ensure that your home is worth more than you owe on the mortgage.