The equity in your house is equal to the value of your property minus all debts. If your home is worth $300,000.00 and you owe $50,000 on your mortgage, your equity is $250,000.00, as long as your property is free of other liens.
As you reduce your mortgage, or as your house value increases, your equity will increase. We’ll look closer at ways you can increase your equity in order to potentially build wealth.
Build equity by repaying your mortgage
Equity in your house is added to your net worth or wealth, which can be calculated by subtracting your assets from your debts. You can get a jump start in building equity when you buy a house by paying a big down payment. Your equity will grow over time as you make your mortgage payments.
Contact your lender if your equity has reached 20% and ask if the PMI premium can be cancelled. This extra money can be used to pay down your principal and increase equity faster.
You can use the equity you have built in your house to create wealth by using home equity loans, home equity lines of credit, cash-out refinances, or reverse mortgages (if you are 62 years old or older).
How to use home equity as a way to repay debt
You may be able use your home equity as a way to repay high-interest loans such as student loans, auto loans, or personal loans. Your new equity loan should have a lower rate of interest, which will help you to save money over time.
Use a debt repayment and loan amortization calculator before borrowing from your equity to ensure it is worth it. Don’t forget to factor in the closing costs of your new loan.
How to use home equity as an investment
You can build your wealth by taking out equity from your home when rates are low, and investing the money in ETFs or mutual funds that offer higher returns.
These investments are not without risk. Especially if you choose to sell during a downturn in the stock market. It’s not for everyone. Speak to your financial advisor before you do this. You’ll need to ensure that the return on investment is higher than the cost of the loan.
Home equity: a way to improve your home
Making strategic improvements to your house could increase its value. Research the cost of home improvements and their impact on your home’s value before you borrow equity. Some projects may sound great, but they won’t pay off your loan or yield enough of a return to justify the cost.
How to use home equity for a new business
Are you thinking of opening a new business? Consider a small business loan. However, some businesses are not eligible, such as real estate companies, lending agencies, charities and nonprofits.
You may still be able use the equity you’ve built up in your house to finance your new business. According to the U.S. Bureau of Labor Statistics (BLS), more than 20 percent of all new businesses fail in the first two-year period. Research your market and weigh up your options carefully before funding your new business using home equity.
Borrowing home equity to purchase a property for investment
You may be able use the equity in your home to pay for a down payment on a vacation property or rental home. Real estate investing can be dangerous, so do your research on the types of properties you want to buy and their conditions.
FAQs on using equity in your home to create wealth
Can I make money by using my equity?
If you have equity in your house, it may be possible to use that to finance home improvements, investments, real estate, a new business, or debt repayment. The strategies described above are not for everyone. Consult a professional financial advisor and determine your comfort level with risk.
Are there any downsides to taking out equity from my house?
If you do it right, you can build wealth over time. However, there are risks involved. Equity-based loans not only increase your debts, they reduce your equity and use your house as collateral. If you cannot pay the loan back, you may be forced into foreclosure. When you take out equity, closing costs and interest are usually required. Make sure you crunch your numbers to make sure that taking a loan is a good idea.
Which home improvement projects build the most equity?
A 20% down payment or higher can give you a significant amount of equity right from the beginning. Making your monthly mortgage payments and adding extra money each month to your principal are other ways you can build equity in the long run. As your house’s value increases over time, you can increase equity.
The Next Steps
For some, using home equity as a way to accumulate wealth is a smart strategy. However, you should always check how much interest and fees you will pay for an equity loan. Watch out for scams, investment fraud and get-rich schemes. Also beware of testimonials that you cannot verify. It’s a scam if someone pressures you into taking out your home equity in order to invest.