What is Home Equity and How is it Useful?
If you own a home and have owned it for a few years now you could be sitting on a fortune and not even know it. The average U.S. homeowners now hold over $274,000 in home equity on average. This is a significant increase since the pre pandemic market which hovered around $186,000. This home equity can be useful in a multitude of ways, you just need to figure out how.
The Basics
Home equity is the amount of money that is held in the asset of your real estate (i.e. home) that would be considered money in your pocket if you sold your home today. Here is a very simple example; You purchase a $500,000 home 15 years ago, taking on a 30 year fixed mortgage. After the 15 years you have paid off roughly $150,000 of your principal balance owed on the home (mortgage payment - interest = principle). For the sake of simplicity we will say that the home keeps the same value over the 15 year period. After 15 years, you have paid $150,000 off on your $500,000 home, meaning you have $150,000 worth of EQUITY in the home.
Now we all know that the market value of your home is always going up, so really your equity on the home will be even more than the principle that has been paid off. You can think of a home like a very cozy savings account. You pay money into it every month, get to live in it, and if you ever run into a rough patch you can pull that money you paid into the home back out for a rainy day.
Things to Do with Home Equity
One thing that many people do not utilize enough is the Home Equity Line of Credit (HELoC). In a HELoC, the bank will look at how much money you have paid off from your actual home and give you a line of credit to reflect that, which you can you for anything you want (as long as you pay it back). This can be used for home improvement, short term investments, when opportunity arises, or if you run into a rough patch with money. A HELoC can be a great alternative to a traditional credit card because the interest rates are so much lower; because the bank has collateral if you default on the loan.
Another great thing about Home Equity is that it can be used to gain a large sum of money very quickly. If you so choose, you can go to your bank and request a refinance. If you have Equity in your home, the bank will pay you out for the Equity that you hold and basically give you a new mortgage. This could be a great tool for investors looking to get a large sum of money quickly, with little downside and no promise of repayment.
Lastly, the Equity that that you have in your home can be turned into profit if/when you decide to sell the house. It could be a great way to get into the dream house that you have been shopping for.
Summary
Home Equity can be a great tool that people easily overlook. Make sure to keep this in mind next time you are thinking about opening a new credit line or making a big investment. Home Equity is a powerful tool that people should be taking advantage of more often.