There are more perks to homeownership than just being your own landlord – home equity is one of them.
Owning property is widely considered to be one of the most effective ways of building wealth. Yes, the property is the asset, but the real value of your home lies in the equity raised. Equity is essentially the part of the home that you own, which increases as you pay off your home loan.
When you have raised enough equity, you have the option to access it. From renovating your property, to buying an investment to buying into the stock market – the world is your oyster, and your home equity is the pearl.
What is equity in a home?
In a nutshell, equity is how much of your home you actually own. Most people don’t own their homes outright – they own a slice of it, and the rest is being paid off through their home loan. Home equity represents the difference between the current value of your home and how much is owing on the mortgage.
Let’s say you purchased your first home for $550,000 and you put down a 20% deposit of $110,000. You take out a $440,000 mortgage on the property to cover the difference. At this point, your home equity is $110,000 ($550,000 home value – $440,000 mortgage = $110,000).
After five years you have chipped away $50,000 from your home loan’s principal. In this time, the value of your home has increased to $700,000. Now, your home equity is $310,000 ($700,000 home value – $390,000 mortgage = $310,000).
How do I access my home equity?
One of the most common ways to access your home equity is by refinancing. When you refinance, you leave your current mortgage and switch to a new mortgage. When refinancing you can choose to stay with your current lender or move to a new one if they offer a better package, interest rate or features that you would like.
Before you can refinance your mortgage, your home will need to be revalued to determine how much it is currently worth. If it has risen in value, your lender might give you the option to refinance based on its new value, which gives you access to the equity you built up by paying off your home.
However, when digging into your equity, it’s important to note you’ll still have to pay it back eventually. You’re basically taking away from the principal amount you’d paid off, so you’ll end up paying it back plus interest over time.
If you would like to discuss your home equity, how you would like to use it, your refinancing options, or if using the equity in your property is right for you and your family, please don’t hesitate to contact one of the Seek Financial brokers, we would love to help you achieve your goals.
The above information is general in nature. It has been prepared without taking into account your objectives, financial situation or needs.