For homeowners or those looking to purchase their first property, home equity is a familiar term and known to be a good thing to have. However, knowing what home equity is and being able to leverage it to your advantage are two different things. Once you understand how to leverage your equity, you will be in a better position to make responsible financial decisions. Read on to discover what home equity is and how you can use it to your benefit.
What Is Home Equity?
Home equity is calculated as being the difference between what you owe on your mortgage and the current value of your home. If your mortgage is currently higher than your home’s current value, you will have negative equity. If the balance on your mortgage is lower than your home’s value, you currently have positive equity.
For example, if your home is currently worth $250,000 and you still owe $200,000 on your mortgage loan, you currently have $50,000 of equity in your home. Think of this as the portion of your home that you currently own outright. You are now able to tap into this sum of money as you see fit.
The equity of your home is not a fixed number and is influenced by a number of things. A change in your home’s value, a recent change in the housing market, and a change in your mortgage can all impact your home equity. It’s important for you to have an accurate understanding of the current value of your home, where you stand with your mortgage, and to understand the local housing market. Doing so will provide clarity on your equity and allow you to foresee any possible changes.
How Can I Leverage My Home Equity?
Equity is one of the greatest benefits of homeownership from a financial standpoint. When you have positive equity you can tap into that money and put it towards a number of things. People commonly put this money towards home improvements, consolidating personal debt, or investing in a college or emergency fund. You can typically tap into equity at lower interest rates which may be tax-deductible. Be careful not to put equity towards risky investments or depreciating assets. Use the available equity in a responsible and strategic way and put yourself in a position to earn a return on your investment.
Investing in Real Estate
One of the best ways to leverage your equity and gain a return on investment is to reinvest back into the housing market. Take advantage of the opportunity and create supplemental income for you and your family. Invest in commercial real estate properties, apartment buildings, and multi-family homes for maximum return. By using your equity as a down-payment, you’re in a financial position to buy and renovate these properties to then rent them out to tenants for a recurring source of income. Be careful where you invest your money and ensure the real estate you invest in is worth it. Doing so will make certain your income from rent will cover the cost of your loan on the property, providing you a long-term supplemental income source.
Sell Properties & Invest In Others
Real estate is filled with opportunities. This competitive market is very fluid and constantly changing, meaning there is bound to be a property that hits the market that catches your eye. There are certainly times where selling one or more properties to then invest in another is the right choice. When investing in real estate, there are things to consider when selling properties to then purchase others, including the property values and the rates included. Be sure to understand all elements of the transaction, and keep a close eye on local market trends to take advantage of the opportunity.
Understanding your home equity and knowing how to leverage it to your advantage will provide you a financial resource that will help you make smarter, more manageable financial decisions. If you have any questions or would like to learn more about your home's equity, contact Dow Realty Group today.