Understanding equity in your home

Equity is an important asset for every homeowner as it can be beneficial in many ways. You may be able to use your equity to improve your lifestyle.
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What is equity in a home?

The equity in your home is the difference between its market value and your remaining home loan balance. To put it simply, this is the value of what you currently own in your home. For example, the market value of your home is $350,000 and you still owe $200,000. When you subtract the loan balance from your property value, you have equity of $150,000.

Your equity tends to build overtime as you continue paying off your loan and as your property value increases. So, if your $350,000 property increases in value by 12% in a year you’ll have an extra $42,000 in equity. Plus the repayments made over the course of the loan can significantly increase your equity. Use our equity calculator to help you find out how much usable equity you have.

There are number of ways you can grow your equity, here are some of them:

  • Additional lump sum payments are advantageous in growing your equity and cutting your future interest charges.
  • Making extra or larger repayments than the minimum repayments required can also increase your equity.
  • Shortening your loan term from the typical 30-year mortgage will increase the size of your repayments but will also speed up your accumulation of home equity.
  • Home improvements, renovations and maintenance can also grow equity by increasing the value of your home.

As long as you decrease your home loan debt, or increase the value of the property through capital growth or renovations, you will increase your home equity over time.

How do you borrow against the equity in your home?

Equity is an important asset for every homeowner as it can be beneficial in many ways. You can use your existing equity when you need a loan. This type of loan is called a “home equity loan” where the borrower uses their home equity to cover the deposit on a new property, while using their current home as a collateral.

Accruing a big chunk of equity can provide many opportunities. If you plan on selling your house, the equity turns into cash once the home is sold. Your equity can be used to finance a new car, fund your home renovation, invest in the share market, for education, or for a family vacation. It may also help you to buy your next house or investment property sooner since you won’t need to save for the whole deposit, which can take time.

How much can I borrow for an Equity Home Loan?

Your lender will conduct a valuation on your property to see the current value of your house. They will also asses your loan to value ratio (LVR) to ensure some equity is held as security. This can also help you determine how much equity is left after refinancing.

To illustrate, let’s use the example earlier, your equity is $150,000. If your lender offers an 80% LVR, then your usable equity will be $120,000 which can be used as a deposit for your next house, or next investment property. If you borrowed more than the LVR, you will be required to pay for Lender’s Mortgage Insurance.

Applying for a home equity loan is like applying for a traditional home loan. Lenders will assess your income, expenses, credit history, your home market value, and borrowing capacity. 

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Tags: equity | equity in home | home loans

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