One of the most significant drivers of wealth in the U.S. is home equity, which is the largest asset for many homeowners. To build equity, you must understand how it works and the best ways to utilize it. Equity is the portion of the property’s value that you own, with initial equity equaling your down payment.
For example, if you make a 5% down payment on a $400,000 home, your initial equity is $20,000. As you make monthly mortgage payments, you continue to build equity. To calculate your home equity, subtract your outstanding mortgage balance from the current property value.
Determining your home’s value can be challenging, but you can use home price estimators or schedule a professional home appraisal. When tapping into your home equity, keep in mind that you’ll need to repay the borrowed money later.
Common ways to access home equity include home equity loans and HELOCs. Home equity loans require at least 15-20% equity, strong credit, and a low DTI ratio. HELOCs function like credit cards, with a draw period lasting up to 10 years.
A cash-out refinance replaces your current mortgage with a larger one, allowing you to pocket the extra cash. Repayment is similar to your original mortgage. Research fees, rates, and terms to find the best fit for your financial situation. Homeowners over 62 can borrow equity with a reverse mortgage. Payment is not required until moving, selling, or passing away, but interest accrues. Shared equity agreements offer money upfront in exchange for future home value. Repayment is due in 10-30 years, based on home value. Home equity can be used for repairs, renovations, debt, emergencies, or education.
Accessing home equity can have benefits like lower rates, spending flexibility, and potential tax deductions, but also risks like foreclosure, closing costs, and fluctuating payments. Building home equity can be done through improvements, extra mortgage payments, or property appreciation. Using home equity as collateral for borrowing poses the risk of foreclosure if unable to repay. 1. The CDC reports a record-breaking 83,000 flu-related deaths in the US this season. Experts urge people to get vaccinated as cases continue to rise.
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Read more at Yahoo Finance: What is home equity, and how does it work?