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What is Equity?

Sep 11, 2019 Topic: Equity

What is Home Equity

Home equity is a term associated with real estate. Over time, homeowners often wonder if there’s anything they can do to leverage the equity that they’ve gained while owning the home. Understanding what home equity is and how to use it is key to making smart decisions about the way to use it when you need it.

Defining Home Equity

Put simply, home equity is the actual part of the home that you own after subtracting any mortgages or other money owed against the home. For example, if you bought a home for $800,000 and owe $600,000 on your mortgage you own $200,000 of it, not including any down payment you made. So who owns the rest? You own the entire house, but it’s used as the collateral for the repayment of the loan.

Because the house is considered collateral, the lender can secure its interest in the home through a lien. And that lien is the loan that gives you the money to buy your house or refinance it as the case may be. Many home loans equally apply payments to your principal and your interest. As the loan is paid down, your equity in the home rises over time.

Ways to Use Home Equity

Home equity is important because you can borrow against it for home expenses and other expenses through transactions such as refinances, home equity loans, home equity lines of credit, and reverse mortgages. People often utilize their home equity to get cash for expenses. This is due to mortgage interest usually being tax-deductible and when that is factored in with the interest rate, home equity transactions are a better alternative to credit cards or personal loans.

Home improvements are one of the most common expenses homeowners use home equity for. Kitchen and bathroom renovations top the list of improvements. But others like improving or building a deck and replacing a garage door or entry door are just as important.

Using your home equity to pay off other debts or set up emergency funds is another way to leverage home equity within reason. Before going through the process to use home equity to pay off expenses, consider how the funds will be used and make sure that the terms of repayment are clear. This is very important because leveraging home equity for personal use could raise debt payments later on.

Leveraging Home Equity with Caution

Home equity is a smart way to take care of expenses. But not all of the methods of leveraging home equity are created equally. So it’s essential to know what some of the cons of these options are. Reverse mortgages don’t require any payments to be made and the amount owed never exceeds the value of the house. But reverse mortgages are very complex transactions and they have high closing costs on top of the interest that accrues on the loan amount.

Home equity loans offer more flexibility in terms of the costs associated with them. But home equity loans and lines of credit require regular payments, along with payments on any existing mortgages on the property. The interest rate may go up over time if it’s a variable one and the payments you make can go up after the draw period closes. Borrowing more than the home is worth can also be a risk since the house value can go up or down over time. The risks of refinancing are similar to home equity lines. A refinance provides cash right away but it extends an existing mortgage and increases any existing payment which may make it a burden later on if there’s a decrease in income.

Leveraging a Piece of Home Equity

The main issue with traditional methods of accessing home equity is they put your home at risk due to terms of conditions of taking the loan like what happens if you default along with interest rates, fees, and closing costs. So why not consider leveraging a piece of your home rather than putting the whole property at risk? SmartRE does just that. It allows homeowners to sell their home in fractions starting at $100,000 with a defined fee. The homeowner can purchase the amount of equity sold back at any time with no set time limit.

If you’re interested in learning how SmartRE can help you leverage your home equity while maintaining ownership of your home, contact SmartRE today!