Choosing to purchase a home was a wise decision on your part. You’re now in control of your own repairs, you don’t have to worry about rent payments increasing, and you can personalize your living space as you please. As we read deeper into this article we will learn more about how can you tap into the equity in your home to build wealth.
What Is Home Equity, and How Does it Grow?
Most American do not buy a home with their own funds. Instead, they use some of their own money and take out a mortgage or use alternative financing to pay for the balance. It is the difference between what your house is worth and the amount you owe on your mortgage.
Say you bought a house for $300,000, used 20% of your own funds, which totals $60,000, and borrowed $240,000 from the bank. The total equity you own in your home is $60,000.
Two things happen with time that increase the equity in your home—you pay down the loan and the value of your home increases.
In the above example, say you pay off $50,000 of principal after making several years of monthly mortgage payments. Even if your home is still only worth $300,000, instead of having $60,000 in equity, now that you’ve paid off $50,000 of principle, you have $110,000 in equity.
Now let’s say that in addition to paying down the balance of your loan, the value of your home also increased by $100,000. Since your home is now worth $400,000 and your loan balance is down to $190,000, you now have $210,000 of equity in your home.
How Can You Tap Into the Equity in Your Home?
There are three basic ways of using equity in your home:
Equity Home Loan
With a home equity loan, the bank would let you keep your original mortgage, and they’ll lend you money based on the remaining equity in your home. You would get a check for the full loan amount, or the funds could be wired to your account. You pay interest on the full amount of the loan.
This is a type of revolving loan where you borrow against the equity in your home as needed. You can use a HELOC like a credit card or a checking account, borrowing as much or as little as you need, up to your credit limit. You only pay interest on the amount of money you actually use.
Similar to an equity loan, the bank would lend you money against the equity in your house. The difference is with a cash-out refinance, you don’t keep your original mortgage. Both the original loan and the new one are incorporated into a single loan based on current rates.
How You Can Build Wealth Using the Equity in Your Home
These are some ideas you can use to increase your wealth by tapping into the equity in your home:
Pay Off High-Interest Debt
You can pay off high-interest debt, such as credit card debt, and save on interest payments. This can free up more money to build up a savings account or for other investments.
Start or Grow a Business
You can use the funds to provide the capital you need to start or expand a small business. As the business grows and becomes profitable, your wealth can increase.
Invest in the Stock Market
Use the money to fund investments in the stock market, which have the potential to generate returns over time. Be very cautious when doing so since stocks can be risky. Always consult a professional before investing.
Fund Your Education
Pay for continuing education or go back to school to acquire new skills and knowledge. This can lead to higher-paying job opportunities and increased earning potential.
Renovate Your Home
Using a loan to make renovations or improvements to your home can increase its value, which can lead to a higher sale price when you eventually sell the property. This can also increase your wealth through equity in your home.
Invest in Real Estate
You can use the money to purchase a rental property. As the property appreciates in value and you collect rental income, your wealth can grow.
I have enjoyed watching many Denver residents build their wealth by using the equity in their homes to buy investment properties. Please reach out to me to find out how you can take the next step toward building your financial future using the equity in your home.