Home Equity – Your Financial Superpower

Homeownership isn’t just about having a roof over your head; it’s also a smart financial move.¹ That’s because your home is more than a place to hang your hat; it’s a monetary asset. One of the keys to financial growth through homeownership is home equity. But what exactly is it, and why should you care? Let’s break it down.

Home equity is the difference between the current market value of your home and the amount you still owe on your mortgage. Think of it as the paid-off portion of your home. Here’s how it works.

When you buy a home with a mortgage, you and your lender share ownership. Your down payment is your initial stake. For example, if you put 20 percent down, your equity at closing is 20 percent.

As you make mortgage payments, your share of ownership grows, while the lender’s share shrinks. So if your house is valued at $300,000, and you still owe $200,000 on that mortgage, then your home equity is $100,000.¹

Why Is Home Equity Important?

Home equity serves more than one purpose. It can:

1. Boost your net worth: Home equity can be part of a long-term strategy for financial health and building your net worth over time. As you pay down your mortgage, you’re essentially converting debt into an asset. It’s like putting money into a savings account that grows over the long run.
2. Fund home improvements: Do you want to renovate your kitchen or add an extension to your home? Your home equity can help. You can borrow against it through a home equity loan or line of credit, often at a lower interest rate than credit cards or personal loans because your house is used as collateral.²
3. Help you attain better borrowing terms: When you have significant equity, lenders see you as a lower risk. This may translate into better terms and interest rates on loans, not just home-related ones.

Making the Most of Home Equity

Now let’s talk about capitalizing on home equity. First, maintain your home well. Regular maintenance and smart upgrades can increase its value. Since not all home improvements are equal, you’ll want to research which upgrades may actually increase your home’s worth.

Second, be mindful of the real estate market. Understanding when to buy or sell and current trends in housing prices can significantly impact your equity.

Finally, keep in mind that home equity loans and lines of credit are not free money. You’ll need to repay whatever you borrow with interest. If you miss payments on these loans, it could lead to foreclosure.² Make sure to consult your financial planner before tapping into your home equity. They can help you consider your options carefully and provide guidance on whether borrowing on your home equity makes sense in your specific financial situation. Remember: MMBB provides financial planning to members at no cost as part of membership.

     ^1. Types of Credit: Your Guide to the Different Kinds of Loans.  

    ^2. Unlock Your Home's Potential: Understanding Home Equity