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IF You Own a Home, You Need to Hear This.

If you are a current homeowner, you’ve probably heard the term “equity” when discussing the value of your home. Given that the home prices are rising across the country amid the current housing shortage and COVID-19 pandemic, you may be one of the millions of homeowners who have significant equity in their homes. 

So, What Exactly is Equity?

Equity is simply the difference between what you owe on your home (i.e., your mortgage and/or other secured debt) and the appraised value of your home. The value of your home fluctuates depending on the state of your local real estate market. If you are putting your home on the market and selling it, equity is the difference between the debt on your home and the final sales price. This is your profit.   

If you have significant equity in your home, you can make it work for you! Generally speaking, you have two options. First, you can borrow from the equity in your home by either taking out a cash-out refinance or taking out a Home Equity Line of Credit (HELOC). A cash-out refinance is the process of refinancing your mortgage for up to a certain percentage of your home’s value. You can “cash-out” the difference between their existing mortgage and your new higher mortgage amount. However, keep in mind that doing a cash-out refinance creates a larger mortgage for your home. 

On the other hand, a HELOC allows the homeowner to use a revolving line of credit for an amount determined by the lender for a certain amount of time. It works similar to a credit card where the property serves as the collateral for this type of loan. Repayment for a HELOC will have a different and separate payment amount from your mortgage and will be at a fixed rate. 

Either type of loan can be used for various expenses, including remodeling your home, college tuition, vacation, a new business, debt consolidation, wedding expenses, etc. Most banks will allow you to borrow a significant percentage of the equity in your home, in some cases up to 90%. 

Your second option is to take your profit (equity) and purchase a new property or save it for something else. This is a popular option for those looking to downsize or nearing retirement. 

Final Thoughts

Overall, tapping into your home’s equity is a low-cost, convenient way to borrow large sums at favorable interest rates in order to pay for home repairs or debt consolidation. Homeowners who have worked hard to accrue equity in their homes can use this to their benefit. Specifically, the equity in their homes can be used to add value or better improve their financial situation in one way or another. Therefore, if you own a home, it’s important to know that you can tap into your home’s equity to improve your finances or achieve your financial goals. 

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