As a new homeowner, you will hear a lot about home equity and how it’s important to build it up. You may have also heard that you can use it to make improvements to your home or consolidate debts.
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But what is home equity and how does it work, anyway?
Home Equity Is How Much of the Home You Own
At its simplest, home equity is how much of your home that you own. For example, if you bought a home for $160,000 and have put down 10%, you own $16,000. Your lender will then provide you with a mortgage loan of $158,400. Home equity is your most powerful tool as a homeowner.
You can use home equity to your advantage by tapping into it when you sell and get a more expensive home, or use it to pay for major home improvements.
Home Equity Can Change Over Time
Home equity changes over time depending on how you are using it, if at all, and the value of your home. For example, if you want to save your equity for when you move into a better home, that’s fine! If you want to use it to make home improvements, you’ll need to take out a loan like a home equity line of credit, home equity loan, or cash-out refinance.
To determine your equity at any one time, you’ll need to know the value of your home. You can get an estimate yourself by comparing homes in your area but for an accurate appraisal, you’ll need a professional real estate appraiser.
Before making any decision regarding your home equity, seek advice from your mortgage professional.
Tips For Building Home Equity
Building home equity is as easy as making your monthly mortgage payments. You can also build up home equity by:
- Making a big down payment at purchase
- Staying in your home for more than 5 years
- Adding curb appeal to boost your home’s value
- Paying more than the minimum each month