What is home equity?
If you’re a homeowner and you bought your home through a bank or other financial institution, you aren’t officially the owner until you’ve paid off the entire mortgage.
Home equity therefore is your share if your home’s value.
You can calculate how much home equity you have by subtracting any money you owe from the home’s value.
As you repay your home loan, your home equity generally increases. Over time, more and more of your payments go towards your loan balance.
Home equity is an asset, so it’s not liquid. It may serve as collateral for a home equity loan.
What are some of the ways to build equity?
Property value increases
This can be done in a number of ways, such as by refurbishing your home and maintaining general good upkeep. Home renovations can result in an increase in equity, especially in a rising property market. Rising prices in your market can also contribute to property value increases.
Amount of debt decreases
Should you choose a shorter loan term, you won’t have to service the debt for too long. If you make extra payments on your home loan, this can also affect your home equity significantly. This essentially means that you owe less on the home and your equity increases.
How home equity loans work:
The equity on your home stands as collateral for the loan, so if you fail to make repayments on the home equity loan, your home could be repossessed.
When you get a home equity loan you get a lump sum of cash, giving you the financial freedom to meet all your needs.
A home equity loan typically has a lower interest rate compared to credit cards.
This type of loan is also usually easier to qualify for.