Home equity is a valuable asset that can help you fund home improvements, consolidate debt or plan for retirement. But it’s important to understand how home equity works so you can use it wisely.
Home equity is the ownership stake you have in your home, calculated by subtracting your mortgage balance from the property’s value. You build home equity through mortgage payments, home improvement projects and the natural appreciation of your property’s market value over time. But you also build home equity when you borrow against your home, such as through a home equity loan or a home equity line of credit (HELOC).
Home Equity Financing: Is It Right for You?
Your lender will typically qualify you for a home equity loan based on your income, employment history, current mortgage information, credit score and an appraisal. You may also need to pay closing costs, which can range from 2% to 5% of the loan amount and can be taken out of the equity you’re borrowing or paid out of pocket.
To maximize your home equity, make every mortgage payment on time and try to pay more than the minimum amount required. That can reduce the amount of interest you pay and speed up the pace at which you build home equity. You can also consider making improvements to your home that boost its value, such as adding an extra bedroom or updating the kitchen. However, it’s typically not a good idea to use your home equity for luxury purchases or things that depreciate over time, like vacations.