One of the great benefits of owning a home is that as you pay off your mortgage loan you build up equity.
What exactly is home equity?
Simply put, home equity is the amount of your home you own. In other words, it's the difference between how much your home is currently worth and how much you owe on your mortgage loan.
Knowing how much equity you have is important, because you can use your home's equity as a financial tool. You can take out home equity loans or home equity lines of credit to help pay for your children's college education, fund the addition of a new master bedroom or other big-ticket expenses.
Determining your home equity
It's relatively easy to determine how much equity you have in your home. First you will need to know your home's current market value.
To get the most exact figure, you'll need to enlist the services of a real estate appraiser. This professional will study your home, and surrounding homes, to determine what your residence is worth in the current market. Of course, this is not a free service, and the cost can vary depending on the size of your home and where you live.
For a more general idea about your amount of equity, you can analyze recent home sales in your neighborhood yourself to estimate your home's current market value.
Say you owe $200,000 on your mortgage and your home is now worth $300,000. That's an easy one. Your home equity is $100,000.
Types of home equity debt
If you do have a large amount of equity in your home, you may be able to turn it into cash through a home equity loan or home equity line of credit.
If you take out a home equity loan, you'll receive a one-time lump sum of cash that you then pay back over a set amount of time. This loan will come with a fixed interest rate, meaning that you'll make the same payment each month.
A home equity line of credit works more like a credit card. With a line of credit, you can borrow up to a certain amount of money for the term of the loan, a term set up by your lender. If you have a $50,000 home equity line of credit, you can borrow $10,000 to pay for a kitchen renovation. You'll then owe the $10,000 that you've borrowed. However, you'll still have $40,000 left on your line of credit. This means that you can borrow as much as $40,000 to pay for other expenses.
Keep in mind, though, that, like a credit card, you will not be able to borrow anything if you've maxed out your line of credit. Until you repay that $10,000 you borrowed, you'll only have access to $40,000.
Home equity debt is a useful financial tool. However, you do have to be careful. The collateral for home equity lines of credit or home equity loans is your home, so you will want to make sure you are using it for the right reasons, making payments on time and reducing the amount you owe.
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