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Equity
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Equity
What is equity?
Equity is the difference between the current value of your home and how much you owe on it. To give you an example, say your home is valued at $950,000 and you still owe $300,000 on it, you’ll have $650,000 of equity. Equity in your home can be used to secure finance for a variety of things. As you’re effectively increasing the amount you owe to your lender and using you home as security for your borrowing.
How to improve equity?
- You can add to the value of your property by renovating and refurbishing your home.
- Your property may appreciate in value if its in a high-growth area
- Reducing the size of your home loan
- Getting your property revalued when markets are high. You could use that extra equity to reinvest, or even if you don’t access the money it makes you look less risky to the banks
- Bigger down payment. The bigger your down payment, the more equity you’ll immediately have in your home
What can equity be used for?
Equity is one of the most important financial tools that comes with owning a home/investment property. You can use it when you sell your current home and move up to a larger, more expensive one or, you can also use that equity to pay for major home improvements, help consolidate other debts or plan your retirement.
When moving, you can use your equity from your last home to put a larger down payment on your next home, allowing you to have a smaller mortgage and smaller monthly payments.
Options for borrowing against home equity
Home equity loan works like a second mortgage. For example, if you have $30,000 in equity, you may qualify for a home equity loan of $20,000. Once the loan closes, your lender will lend this $40,000 in a single payment and you’ll end up paying this loan back in monthly instalments with interest, just as you pay back your primary mortgage.
HELOC works like a credit card, only the credit limit is tied to the equity in your home. If you have $40,000 in equity, you might qualify for a HELOC with a maximum spending limit of $30,000, meaning you can borrow up to $30,000 but no more. Similar to a credit card, you only pay back what you borrow. If you only borrow $15,000, you’ll only have to pay back $15,000.
In a cash-out refinance, you refinance for more than what you owe on your mortgage. If you owe $150,000 on your mortgage, you can refinance your mortgage for $170,000 and take out the extra $20,000 and from then on in, you pay the $170,000 in monthly payments with interest. How much extra you can include in your cash-out refinance depends on the equity in your home
How to access equity?
When it is just “equity” it isn’t real cash. It is just a “mental concept”. So, when you sell your property you receive cash. This effectively turns the full value of the property into real cash. For example, if you were to own a property worth $200,000, but you still owed the bank $80,000, you would have $120,000 in equity. If you then went on to sell this property, you would receive $200,000, but you would still owe the bank $80,000, meaning you would get to keep the $80,000
As previously mentioned, you can re-finance your loan to access your equity. By proving to the bank that if you default and they have to sell the house they will get their money back, you can re-finance your home loan to access your equity. However, many lending institutions will have a “safety net” represented by 20% of total equity. This is equity is inaccessible to the loan to safeguard against the borrowings on your home loan. This means you can potentially access 80% of your equity LMI is a one off non-refundable, non-transferrable insurance premium that’s added to your home loan. LMI protects the bank against any loss they may incur if you are unable to repay your loan.