Real estate is an often overlooked asset that offers attractive capital to any homeowner looking to raise money to invest in a project or consolidate debt. There are a number of ways to build equity in your home, but there are also ways to get money out of your property.
How do you calculate the equity in your home?
Home equity is the difference between the value of the property and the balance on your mortgage. For example, if your home is valued at $450,000, and you have a balance on your mortgage of $250,000, your home equity is $200,000.
Benefits taking equity out of your property
Taking money out of your home provides a number of benefits. If you want to use the equity in your home to borrow money, you can take advantage of low interest rates compared to other types of loans such as lines of credit, credit cards or personal loans.
Most people who want to have access to large amounts of money to do a renovation, start a project or consolidate their debts, tend to borrow money against the value of the house. This is the least expensive and safest way for homeowners to borrow money. This type of loan offers better interest rates and is secured by the home.
In addition, if you borrow money against the equity in your home to invest, for example, in renovations, you can take a tax deduction on the interest charged. A home equity loan gives you the freedom to use the amount borrowed for any investment you want, unlike car or student loans that require restrictions on use.
Risks to consider
In addition to the benefits of taking the money out of your home, there are also some risks to consider. In this type of loan, the home is considered the primary collateral for the mortgage. So, if you fall behind on payments over a period of time, you run the risk of having your home foreclosed on by creditors.
In addition, home equity is closely tied to real estate market values. So any change in the real estate market will cause changes in the value of the property. If the value of the home decreases as a result of a downturn in the real estate market, you may find yourself paying back more money than your property is worth.
8 ways to build equity in your home
Refinance your mortgage
If you have owned your home for many years, your property will likely have increased in value tremendously. You can take advantage of the extra value by refinancing your mortgage, which can be as much as 80% of the equity in your home. Refinancing your mortgage allows you to benefit from a significant amount of money that is deducted from the difference between the current value of the house and the mortgage.
When to refinance your mortgage?
Get a new mortgage
Home equity is an ideal borrowing solution because it offers both lower interest rates and a higher credit limit than other unsecured personal loans. You can take advantage of a second loan that works like a mortgage (fixed amount to be paid back over a set period of time).
You should know that a conventional mortgage is a loan that allows you to repay a minimum of 20% of the value of the house and to borrow an amount equivalent to 80% of the purchase price. Therefore, to take advantage of a mortgage loan initially, you must make a down payment that corresponds to 20% of the purchase price.
Opt for a mortgage line of credit
A home equity line of credit provides easy access to available credit and lower interest rates than other types of unsecured loans. In addition, you only pay interest on the amount you borrow. A line of credit allows you to borrow any amount of money you want as long as it is within your credit limit.
It is a solution that adapts to your needs and guarantees a lot of flexibility. In fact, you can decide to repay the amount you borrowed at any time, without penalty. You can also use a home equity line of credit to increase the value of your home or to consolidate your debts at better mortgage rates.
Mortgage refinancing VS home equity line of credit
Make a large down payment
The equity in your home depends on the market value of your home and the amount you paid to make it your own. So the larger your initial investment, the more equity you will have. A large down payment saves you money in the long run by reducing your monthly payments in the future, but also increases the equity in your home.
Investing in your home
If you want to increase the value of your home, simply invest in your property to improve it. There are various ways to invest in your home:
- Carry out interior renovation work
- Modify the front of the house
- Add solar panels
- Opting for an energy-efficient home
- Improve the outdoor space
The most important thing to remember when doing work on your home to increase its value is to make sure that the return on your investment is significant. Some of the most popular current trends include creating an outdoor space, adding a pool or patio and renovating the kitchen or bathroom.
Modify the terms of the mortgage
Ways to increase the value of your home include getting a shorter term mortgage or increasing your monthly payments. For example, if you already have a 30-year loan, you can opt to refinance your mortgage to reduce the term to 15 years. This allows you to build equity in your home while paying off your loan over a shorter period.
However, be aware that this means paying higher monthly payments, so it is important to check your ability to pay to ensure that you can meet the payments and protect yourself from the risk of foreclosure. Also, if you want to make extra payments to pay off your loan faster, consider asking your lender if there are any penalties for early repayment.
What does it mean to refinance a mortgage?
Improve your credit rating
Although credit history does not have a direct impact on home equity, it does affect your ability to borrow money. Therefore, improving your credit rating means increasing your borrowing possibilities. Be aware that homeowners with poor credit records are considered high risk by lenders and tend to be denied new loans.
Follow market fluctuations
This is the most passive approach, but is a less risky alternative for people who already have many monthly expenses. The real estate market changes over time, so the equity in your home changes with it. So when demand is high, prices rise and the value of your home increases.
If you own a property and you want to increase the value of your home in order to access that equity, you can contact one of our consultants. The team at Refinancement Hypothécaire will be happy to put all its expertise and know-how at your disposal to help you get the most out of your property.