What is home equity?
Home equity is the difference between the market value of a property and the amount of outstanding mortgage debt on it.
In other words, it’s the portion of a property that a homeowner actually owns outright, free and clear of any mortgage debt.
You can think of the equity of the house as the “savings account” of your home. Just as you put money into a savings account to build up your financial reserves, you pay off your mortgage and build up the value of your home over time.
How to calculate equity in a home?
To calculate your usable home equity in Australia, you need to determine the current market value of your property and subtract the outstanding mortgage balance. The resulting figure is your home equity. Here is the formula:
Home Equity = Current Market Value of Property – Outstanding Mortgage Balance
For example, if a property is worth $500,000 and there’s an outstanding mortgage debt of $300,000, the homeowner has $200,000 in home equity.
How does equity of home build up over time?
Home equity builds up over time as the value of a property increases and/or as the mortgage debt is paid down. There are several factors that can contribute to building home equity:
- Regular mortgage payments: Each time you make a mortgage payment, you are paying down the principal balance of your loan and building up equity in your property.
- Appreciation: If the value of your property increases, your home equity will also increase. This is because the market value of your property is now higher, and the outstanding mortgage balance remains the same.
- Home improvements: Investing in home improvements can also increase the value of your property, thereby building up your home equity.
What can you use the equity in home for?
Home equity is a valuable asset that can be used for various purposes. Some common uses of home equity include:
- Home improvements or home renovations
- Investing in real estate, i.e., purchasing an investment property
- Car purchase
- Debt consolidation (e.g., credit card balances, personal loans, etc)
- Education expenses
- Medical expenses (especially treatments that may not be covered by insurance)
- Business start-up
- Vacation
- Emergency funds for major life upheavals (e.g., job loss, medical emergency, etc)
- Wedding expenses
Steps in borrowing on equity
1. Refinancing
Refinancing involves obtaining a new mortgage loan to pay off your existing mortgage loan. You can refinance your mortgage to take advantage of lower interest rates, switch to a different type of mortgage, or access the equity you’ve built up in your property.
When you refinance, you receive a new loan based on the current value of your property and your outstanding mortgage balance. You can choose to take out a larger loan than your existing mortgage balance, which will allow you to borrow against home equity.
We recommend consulting with a refinancing broker to explore your options.
2. Home equity loans and lines of credit
You can have your home equity release via a home equity loan. A home equity loan is a loan that is secured by your home equity. This means that your home serves as collateral for the loan, and the lender uses your home equity as a basis for the loan amount.
Home equity loans typically have lower interest rates than unsecured loans, such as personal loans or credit cards, and can be used for a variety of purposes, such as home improvements, debt consolidation, or medical expenses.
However, it’s important to keep in mind that a home equity loan increases your overall debt, and if you default on the loan, you risk losing your home.
Do you have equity in your home? Ask us at ZEP Finance
When considering whether to access your home equity, it’s important to consider your financial goals, monthly budget, and the overall cost of the loan.
If you’re interested in finding out if you have equity in your home, ZEP Finance can help you determine the current value of your property via a home loan health check and assess your financial options.
Contact ZEP Finance today to learn more about your home equity and how you can access it to achieve your financial goals.
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