What is Home Equity?

Buying a home is a major event in your life. It is an investment that, over time, could significantly increase in value.  As the years progress, the value of your home could increase dramatically.  When the time comes to sell, hopefully you'll end up being able to get more money for your home than what you originally paid for it; giving you a profit.

However, the resale value, or even the appraised value before a sale, of your home is not the only value your home has.  When you purchase a home and make payments on your mortagage, you start building what is called home equity. Home equity is the difference between the value of a home and the amount owed on the home. As the principal of the mortgage amount decreases as a result of monthly mortgage payments, the home equity increases.  This is true even if the home doesn't increase in value. You can build home equity from an increase in the value of a home and also from paying down the mortgage debt that you owe on your home.


What is the Value of Home Equity?

Home equity is money in the bank.  You can borrow against their home's equity to pay for home repairs and renovations, school tuition, costly medical expenses, and even pay off other debt.  Your home gives you financial opportunities not many lenders can provide.  Home equity is a huge advantage to purchasing a home and a great financial resource to have. You never know what surprises that life will throw at you.  It's always good to have a "nest egg" of readily available funds to turn to if you're faced with a big financial crisis.


How do I use My Home Equity?

If you want to use your home's equity to be able to afford some home repairs, college tuition, etc... you first need to get a home equity loan.  A home equity loan is a loan based on your home equity. Below are two common types of home equity loans:

1) A second mortgage (traditional home equity loan)

2) A home equity line of credit loan.

A second mortgage is a loan where the lender lends you a chunk of money, based on your home's equity, and interest starts accumulating once the loan is issued.

A home equity line of credit loan, is a loan where the lender presents you with a credit card or checkbook that you can use to make purchases.  Similar to a second mortgage, the amount you can spend is based on your home's equity.  However, unlike a second mortgage, interest on a home equity line of credit loan doesn't start accumulating until you make your first purchase with the card/checkbook.

Both home equity loan types are feasible means to utilizing your home's equity if you need some cash for repairs or something else.

Which type of loan you choose is up to you and what loan fits your specific financial needs.  Both loan types are usually low interest loans and, for most home equity loans, the interest you pay is tax deductible.

It is very important to remember that when you take out a home equity loan, it means the lender can reposes your home if you default on your payments.  If you don't pay your loan in full or default on too many payments, the bank or lender can take your home and use its current value to pay for what's owed.  It's crucial that you make your loan payments. A home equity loan is a great financial resource, but if you don't pay it back, it could end up costing you your home.

Purchasing a home is a venture that is well worth taking. The appreciation of your home's value and the equity you can build from it, make your home a profitable investment that can't easily be matched.