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How Does Home Equity Work?

Owning a home is appealing for several reasons, but one of the most critical aspects of homeownership is the potential for home equity. Earning equity through your homeownership can change your future and open up an entire world of possibilities. So what exactly is home equity, and how does it work? How can you get home equity to work for you? 

Our experts at Local Home Buyers understand the importance of home equity and the way it can impact your future finances and ability to buy bigger, better homes. There are a few key elements of home equity you need to understand if you are a homeowner or want to become a homeowner soon. 

What is Home Equity? 

Equity is the difference between the worth of your home and how much you owe on its mortgage. Essentially, equity is non-liquid currency you are earning through owning your home. For example, if you take out a mortgage for $250,000 for a new home, and within a year, your home’s price has risen to $300,000, you will have $50,000 in equity. In all likelihood, your equity would be even higher since you were also making mortgage payments each month to lower than $250,000 principal owed. 

How Do You Build Equity? 

You build equity by buying a home and making payments on the mortgage. You can build greater equity faster by putting down a larger down payment, or paying down your mortgage faster. The value of your home can go up due to market changes or if you significantly improve your home with renovations. Your equity at any given time can be determined by an appraisal and the outstanding balance on your mortgage. 

How Can You Use Equity? 

So if you have equity in your home, what does that mean? How can you use it? Having equity means you are making money through homeownership, and you can utilize that money in a variety of ways. 

  • Buy a New Home. When you have equity in your home, you can sell your home, pay off your mortgage, and have a nice down payment for a bigger, better house—whatever that might look like for you.
  • Home Equity Loan. You can borrow against the equity in your home to get a home equity loan. According to Forbes, these loans are easy to get and feature low-interest rates but are guaranteed by your home. If you stop making payments, they can foreclose on your house.
  • Cash-Out Refinancing. With substantial equity in your home, you may be more interested in a cash flow that won’t require repayment or interest. You can refinance your mortgage and cash out the equity you’ve built. A cash-out refinance of home equity can be appealing when paying for a child’s education, unexpected medical costs, or to fund retirement. 

No Equity? We Can Help 

Unfortunately, many homeowners find themselves without equity, or with less equity than they need. If homeownership isn’t a smart financial decision for you now, or you’re looking to get your equity out now and move on to your next home—call us. We can sell your home and get you the cash you need now. 

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