What is Home Equity and Why is it Important?
Becoming a homeowner comes with many responsibilities: paying your mortgage and property taxes on time, keeping current with your homeowner’s insurance, making home repairs in a timely fashion, and even making improvements to add value to your home when it comes time to sell. And with these obligations also comes the ability to build wealth.
In addition to the safety and security of owning your home, did you know that it becomes a savings account that can earn impressive returns? It’s also known as home equity.
When securing a loan, most homeowners are required to have a down payment which will determine the amount of your monthly mortgage payment. Those first few years of mortgage payments will pay down the interest of your loan.
But typically, after about five years, you’ll start paying down the “principal,” which is the original amount of money loaned to you. And that money will go toward the equity or ownership that’s yours alone – not the mortgage company’s.
Your home equity is the amount of money that you, as the homeowner, owns outright in your home. While the bank or mortgage company may have the majority ‘ownership’ of the home, over time you’ll gain a higher stake in the claim.
Over the last several years, homeowners in the Denver metro area have gained an enormous amount of equity due to skyrocketing home values. As a result, some have opted to sell and either upsize, downsize or move to a new location.
This can come in handy should you ever want to refinance your home or take out a home equity loan or line of credit. Lenders will usually let you borrow 80-90 percent against the equity you have in your home.
Home equity is also important if you are considering selling your home. Over the last several years, homeowners in the Denver metro area have gained an enormous amount of equity due to skyrocketing home values. As a result, some have opted to sell and either upsize, downsize or move to a new location.
Home Equity Can Unlock Opportunities
Sometimes it’s easy to get caught up in your daily life and not even realize the cash you’re sitting on in your home. Sure, when you bought your first home, you hoped to make some money on your investment but now you’ve gotten comfortable with your surroundings. Maybe you’ve taken advantage of the low-interest rates of the past and refinanced. Regardless of your circumstances, it’s good to know exactly how much money you may have at your disposal, compliments of owning your home.
To determine your home equity, you’ll need to know the amount of your outstanding mortgage(s) and the market value of your home. A Usaj Realty broker can assist you in establishing that amount or you can do a search of similar properties in your area to get a ballpark figure of your home’s value.
Determine Whether Now is the Right Time to Sell
Once you’ve established the amount of your outstanding mortgage and the market value of your home, subtract the mortgage still owed from the market value of your home. You might be surprised at the amount of money you’re looking at.
For example: Say you bought your Denver home in February of 2017 for $394,000 (the median price of a single-family home that month). You put down a 20 percent down payment of $78,800, and you were approved for a 30-year fixed rate mortgage of $315,200 at 4 percent interest.
It’s now May of 2023. The median price of a single-family home in Denver is $680,000. If you use that figure as the market value of your home and you subtract the remaining balance of your mortgage (~$272,000 based on an amortization table), you would pocket $408,000.
That amount of money would allow you to make a nice down payment on a new house, invest in your child’s college fund and add to your retirement account.
Conclusion
Not everyone is in a position to sell their home. Maybe you’re still raising kids and want to stay put for a while. Perhaps you don’t have the equity yet to make a change. Regardless, it’s important to know how much equity you have in your home and how it impacts your financial future. Remember, your home can work for you – whether it’s to refinance, get a home equity loan or line of credit, or eventually to cash out your investment.