HOME EQUITY; What it is and how you can use it?

WHAT IS HOME EQUITY?

Home equity is the value of a homeowner’s financial interest in their home. In other words, your stake in the property as opposed to the lender’s. In practical terms, home equity is the appraised value of your home minus any outstanding mortgage and loan balances.

Home equity can refer to more than just a mortgage loan that has been repaid. Homeowners can borrow money against this asset to cover crucial expenses like paying off high-interest debt or covering college costs.

HOW HOME EQUITY WORKS

Home equity is a formula that reveals the gap between the value of your home and the amount you owe on it. Mortgages are usually included in what you owe. These might be second mortgages that you obtained afterwards or purchase loans that you used to acquire the home.

If?a portion or all of a home is purchased via a mortgage loan, the lending institution has an interest in the home until the loan obligation has been met. Home equity is?the portion?of?a home's current value that?the owner possesses at any given time.

HOW TO CALCULATE HOME EQUITY

To?calculate the equity in your home, follow these steps:

Find out the estimated current market worth of your home. Your home may not be worth what you bought for it last year or even a few years ago. To gain a more precise estimate of your house's market value, you can use online home price estimator tools, but you should also think about speaking with a local real estate agent or certified appraiser.

Subtract your mortgage balance. Subtract your mortgage balance and any other debts that are secured by your house from the market value of your home once you know it. Your home equity is the end outcome.

EXAMPLE OF HOME EQUITY

Imagine you spent N200,000 on a home. You put down 20% and get a mortgage for the remaining amount of N160,000. 20% of the value of your property, or N40,000, is your equity. Despite being the owner, you only "own" a portion of it worth N40,000 in total.

Imagine that the real estate market booms and your home's value doubles to N400,000 in this scenario. Your mortgage balance is now N140,000. You therefore have a N260,000 or 65% equity.

HOW TO USE HOME EQUITY

Since home equity is an asset, it contributes to your overall net worth. If necessary, you can withdraw a portion or the entire amount of your equity; otherwise, you can accumulate the money and leave the entire value to your successors.

If you decide to spend some of your home equity today, there are a few ways you may make your asset work for you.

• Cancel your private mortgage insurance when your equity reaches 20%. Usually, PMI is automatically canceled once your equity reaches 22%. However, you can request its removal at 20%.
• Sell your home, you can take your equity in the home from the sale proceeds, if and when you decide to move. You won’t get to use all the money from your buyer if you still owe on a balance on any mortgages, but you’ll be able to use your equity to buy a new home or to bolster your savings.
• Pay off credit card balances that carry high interest rates. Rates on home equity borrowing are usually much lower.
• Pay for bills or needed purchases with home equity funds instead of credit cards or loans to avoid incurring higher-cost debt. For instance, use the funds to?pay for college tuition?and expenses instead of taking out a student loan. Make needed changes to your home without taking out a higher-rate personal loan.

HOW TO INCREASE YOUR HOME EQUITY

Once you understand the benefits of home equity, you may want to focus on building it.

• Make as large a down payment as possible on the home you're buying to accrue equity instantly.
• Be aware of the type of mortgage you're getting. For instance, to build your equity consistently, avoid an interest-only loan. Payments for that go toward interest alone. No principal is paid off until a single lump sum is required.
• Make every mortgage payment and try to pay more than the minimum amount required.
• Stay in your home to take advantage of any increase in its value. The longer you're in it, the more likely you'll see some appreciation. That adds to your equity stake.
• Consider making improvements to your home that add value to it. Not all changes a homeowner makes necessarily boost its value, so do your research.

WHAT IS A HOME EQUITY LOAN?

A home equity loan is money borrowed against your home's appraised value. You receive the funds in a lump sum and must make monthly payments, just like any other type of loan. Once you’ve received your loan, you start repaying it right away at a fixed interest rate, meaning you’ll pay a set amount every month for the term of the loan, whether it’s five years or 50 years.

A home equity loan is essentially a second mortgage on your home, meaning a debt secured by your property in addition to the first mortgage you used to buy it.

HOW CAN I GET A HOME EQUITY LOAN?

By contacting a lender that provides these types of loans, you can obtain a home equity loan. Getting a professional evaluation of your home is the first step to determining its market value. A lender will also look at your credit and debt-to-income ratio in order to determine whether you have enough equity in your house to qualify for this kind of loan. If you are approved for a home equity loan, the money will typically be disbursed to you in one lump sum following the closing. With fixed-rate monthly payments, home equity loans are essentially a second mortgage on your home.