Home equity is the difference between the mortgage owed on a property and the current market value. Home equity has a zero rate of return and is not liquid. Home equity management is putting otherwise lazy idle money to work in a liquid, safe, tax-favored way to create an arbitrage. Arbitrage, simply put, is borrowing money at one rate and earning a higher rate elsewhere.
How Do You Build Home Equity?
Your home equity can increase in a few circumstances:
When you make mortgage payments.
When the property value rises.
When you make specific improvements to the property.
How to Maximize Your Home Equity?
Several factors can determine the amount of equity you have at home. Some of these factors include the type of property, the age, and the location. The following are some tips that can help maximize your home equity.
You should look for properties with a high value.
You should consider buying an investment property if you want to build up your savings in a short period.
You should consider buying an investment property if you have a low down payment and need to borrow money for closing costs.
Example: Home Equity
Suppose you have obtained a first mortgage of Rs 75 Lakhs for ten years on your property worth Rs 1 crore. The initial amount of home equity would be Rs 25 Lakhs, i.e., Rs 1 Crore -Rs 75 Lakhs (Home Value – Home Loan). Suppose, over five years; you repay an amount of Rs 35 Lakhs on the principal outstanding. Your home value has increased by Rs 40 lakhs in these five years. So, after five years, the revised home equity would be Rs 1 Crore {(1 Crore+ Rs 40 Lakhs) – (Rs 75 Lakhs- Rs 35 Lakhs)}. Now, you have home equity worth Rs 1 Crore, which could be used for a home equity loan if required.
Why does Home Equity matter?
Home equity is a form of wealth used to buy or build a home. It is an asset created by the house’s value, which can be sold or refinanced. Many people are unaware that they have home equity. They might not know what it means to have home equity, how much they have, or how to use it. However, there are many benefits of having this wealth, and knowing these benefits can benefit both the homeowner and their family members in the future.
The main reason why people should maintain their home equity is that they may need to use it in case unforeseen circumstances happen, such as if they lose their job and need money for living expenses or if they want to save up for retirement and want to invest in stocks instead of retirement accounts.
Home Equity Loan
A home equity loan is a loan in which the borrower uses the equity in their home as collateral. These loans sometimes help families finance significant home repairs, medical bills, or college education. It is a mortgage taken by keeping the home equity as the collateral. There may be a second mortgage taken against the same property on which there is already a lien placed by a first mortgage.
Different Types of Home Equity Loans
Home equity loans are one of the most popular types of loans. They allow you to borrow money from your home’s equity, which is the difference between the market value of your home and its actual value.
Some home equity loans are:
· Home Equity Line of Credit (HELOC)
· Fixed-Rate Home Equity Loan
· Adjustable-Rate Home Equity Loan
· Refinance a Mortgage with a Home Equity Loan
· Reverse Mortgage
Conclusion: Start building Your Home Equity
The most popular way to use your home equity is by taking out a home equity loan and investing the proceeds in funds that will provide you with a higher return on your investment. You could also use it to pay off debt or purchase other assets such as stocks or real estate.
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