Homeowners hear this line a lot: “You need to build up your home’s equity!” You may have also heard that you can use your home’s equity for everything from refinancing to consolidating debts.

But what is home equity, and why is it so important? When should you use it?

Home equity is the amount of the home’s value that you own

monthly mortgage paymentsSimply put, home equity is the amount of the home’s value that you officially own. The down payment you put towards the house on purchase is counted towards your home equity. For example, if you place $20,000 down on a home of $200,000, you can calculate that your home equity is $20,000.

When your home appreciates in value, you can use this simple equation to calculate your home’s equity:

Market value – amount still owed to the bank = home equity.

For example, $320,000 market value minus $100,000 amount owed equals $220,000 in home equity.

Home equity allows you to take out HELOC and home equity loans*

When you’ve built up enough home equity, you have the option to use that money by taking out a home equity line of credit (HELOC),  While this line of credit behaves similar to a credit card, remember that your home is on the line here, so it isn’t advised to use it unless absolutely necessary. Using it to improve the value of your home, such as when you want to make repairs, is a good use since the money you are taking out of your home is going right back in to improve your equity.  This is known as revolving credit.

A home equity loan is also known as a second mortgage using your home as collateral, giving you a fixed amount of money to use rather than the revolving credit of a HELOC. Remember that these two options are not the same.

Before making any decision regarding your the equity on your home, seek advice from your mortgage professional. While SmartMortgage does not offer these loans directly, they can help you understand your options.

Home equity can change over time

Depending on how you use it, home equity can change over time with the value of your home. To calculate your current equity, you’ll need to know the value of your home.  You can get an estimate yourself by comparing homes in your area, or by checking your Homebot account if you are a Guild customer, but for an accurate appraisal, you’ll need a professional real estate appraiser.

Home equity helps you get your home refinanced

Home equity is also a factor in getting your home refinanced. When you refinance your home, you’re essentially replacing your original loan with a new one. As such, you will need to build up enough home equity for your home to be used as an asset during the refinancing process.

Tips for building home equity

Building your home’s equity takes time but it’s as easy as making your regular monthly mortgage payments. You can build up your home’s equity in several other ways:

  • Making extra mortgage payments each month when you can
  • Improve your home value with maintenance and improvements
  • Make a larger down payment

Curious if you have enough equity in your home to make it work for you? Reach out and one of our SmartMortgage advisors for a free mortgage review.

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*Home equity lines of credit and home equity loans are not financed through Guild. Please consult a financial advisor for more information.

The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.