One of the biggest advantages of owning a property is the gradual (or rapid, if you live in South Jersey) accumulation of equity. But what exactly is home equity, and how can you put it to use? Let’s talk about the most strategic ways to leverage it for your benefit:
What Is Home Equity?
In this country about 23% of homeowners own their home “free and clear” — i.e. they have no mortgage, or they’ve paid off their mortgage. This means a huge number of people do have debt in the form of a mortgage.
When we talk about equity, what we’re talking about is the portion of the property you truly “own” — and not the amount you still owe to a bank. There are two simple ways in which your equity can grow:
- You pay off more of your mortgage principal. Your monthly mortgage payment is offered called a PITI payment — standing for Principal, Interest, Taxes and Insurance. Paying off more of the principal portion is what helps reduce your debt, so that you own more of the property.
- Your home appreciates in value. The annual average home price appreciation rate is around 3-5% nationally, but if you live in an area with more buyer activity like South Jersey this number could be much higher.
In fact, homeowners with mortgages have had an equity increase of nearly $600 billion since 2019. That means that in the first quarter of 2020 alone, the average homeowner gained about $9,600 in equity in just one year! The equity in your property is one of your biggest financial tools, and it can be used in a myriad of ways.
3 Ways You Can Leverage Your Equity
1️⃣ Bridge Loan
This type of loan is usually for the short-term while you move from one house to another. A bridge loan enables a homeowner to secure funds for buying their new home before they sell their existing home, based on the equity of that existing home. Bridge loans usually have quick approval times meaning if you need to ‘jump’ on a house that’s come on the market quickly, this type of loan can make that possible.
2️⃣ Home Equity Line Of Credit
Being one of the most flexible options for your equity, this type of financing opens up a line of credit that you can use when you need it. The amount you can borrow depends on your existing equity of your home, and that amount ‘sits’ there until the time is right that you want to move to a new home. Since you might not withdraw the funds immediately, a HELOC is divided into two pay periods: the draw period and the repayment period.
3️⃣ Cash-Out Refi
With this type of refinancing product, you are simply borrowing more than what you owe on your mortgage, essentially taking on a bigger mortgage payment, and you can use the extra funds for whatever you like. Many people use cash-out refis for property repairs.
Ways You Can Put Your Equity To Work
Many homeowners simply want to let their equity sit there and accrue. For others, however, they want to make their equity work for them. Whether it be using it to pay off student loans to avoid hefty interest fees, or use it to invest in more property. Let’s talk about the most popular reasons for equity withdrawal:
🔨 Home Renovations
Embarking on a home renovation project is a super common use of home equity. Whether it’s remodeling the kitchen, fitting brand new appliances, expanding the bathroom, or updating the roof. You can really make your equity work for you by choosing upgrades that will actually increase the value of your home; this builds even more equity as a result.
If you want to have a chat with a trusted South Jersey real estate expert about which home renos will offer the best return on investment, send us a message.
🏢 Buying An Investment Property
Many homeowners have seen the incredible appreciation in their own home and want to turn that to profit. It’s not uncommon to pull equity out of a primary residence, and use that to fund a condo that can be rented out to tenants, or even a multi-unit complex for the adventurous! When considering an investment property, you’ll want to think about:
- the location of these properties (do you want your property to be super close to your primary residence, or do you want to take advantage of one of the best US cities to invest in a rental property?)
- whether you’ll self-manage or hire a management company
- whether your property will be a short-term or long-term rental
By pairing up with a hyperlocal real estate agent, they’ll be able to establish the equity you have available in your home, and help you locate some lucrative investment opportunities.
🔄 Debt Consolidation
Do you currently have debts on high interest credit cards? Or perhaps student loans that are just accruing so much interest? Many people use cash-out refi loans to help manage and consolidate debts like these.
Whether or not this will work for you will depend on the current interest rates of mortgages, compared to the interest rates on your other debt. Speak to a trusted financial planner and mortgage lender for more information.
🆘 Creating An Emergency Fund
HELOCs are particularly useful for establishing an emergency fund; since they are lines of credit that you don’t need to use right away, you might want to consider establishing a HELOC in case you need it for the future. Some situations to think about:
- What if your basement flooded and you needed funds for waterproofing?
- What if your roof leaked and it needed an emergency repair?
- What if your car broke down and insurance won’t cover it?
Using your home’s equity can help serve as a lower-interest alternative to costly credit cards and payday loans. If you set the HELOC up before you need it, you’ll have immediate access to your money faster. It’ll be ready to go, just in case.
Be Aware
Tapping into your home’s equity means that your home does become loan collateral. As in, you could lose your entire home if you default on repayment of your loan. This is why it’s important to think through any money move you make, and speak to an expert real estate agent, mortgage lender or financial planner before doing anything hasty.
It’s especially advised against using home equity to fund a new car, or to go on an expensive vacation, or for a wedding. It’s a big risk to use the equity in your home for items that you won’t see a return on, or don’t contribute back to your home in any way. There are many moves you can make, however, that really will put your equity to work, and we'd love to help you realize those opportunities.
