Thrive Invests

Home equity is a valuable resource that often people seem to forget they have. It is the component of your property’s value that is actually yours and the part that increases over time through prepayments on the mortgage and property appreciation. In this article, we’ll explore how home equity works, ways to build it, and how you can leverage it to achieve your financial goals while understanding the risks involved.

What is Home Equity?

As a credit product, home equity can be understood as the range of that part of the home value that you fully own. It is arrived at by deducting your current balance of mortgage from the market value of the home. For instance, if your house is determined to be worth $400,000 and yours mortgage is $250,000, then your home equity is $150,000.

How Home Equity Grows

Your home equity increases through two main factors: also on the part of paying down your mortgage and the part of appreciation of property values. With a given payment, the loan balance is reduced on the other hand increases in the market price in the region make your home worth more. This dual effect contributes to the growth of your equity more than anything else.

Using Home Equity Wisely

Once you’re established you might be able to use equity for large financial requirements. HEL and HELOC can be used to borrow money out of the homeowner’s equity for home improvement or the payment of credit card balances or any other high interest bearing loans. The main difference lies in how the funds are accessed: HEL pays a single cash lump sum, while under HELOC an applicant is granted a credit limit which may be drawn on as and when required.

Risks to Consider

As mentioned above borrowing against home equity has its advantages, but one must also know the disadvantage. Taking your home as security means you stand to incur the full cost of the money borrowed. That is; if you are unable to meet the payments made they lead to repossession of the house you have. A person must assess the reason behind the borrowing of money against home equity and determine the efficacy of the investment.