Never-ending college tuitions, a new car model or a major home renovation project are some of the reasons you and your family may want to borrow from a bank against your house’s equity. If you are a homeowner-turned-into-an-investor rookie, the chances are you also might be thinking of accessing your home’s equity to improve your chances in this field. No matter what your reasons are, it is crucial to know what you have to work with from the start, by determining the equity of your personal home so that you can fructify it.
What is “home equity”?
Home equity translates as the asset that comes from a homeowner’s interest on a residence. To calculate your equity, subtract any outstanding loan balances, current and updated, from the property’s real market value. Home equity might increase over time if the property’s value increases at the same rate, or if the loan balance is paid down in time.
To put it in another way, home equity is the “part” of your estate that truly belongs to you. You certainly own your current home, but if you borrowed money from a bank to buy the property, your lender also has the right to an interest on the property, at least until you pay off the loan in its entirety.
Home equity is usually a homeowner’s most valuable asset, no matter from what point of view you look at it. That valuable asset can be used later in life for further investments, so it’s important to understand how it works, what are the tricks and the pitfalls, and how to use it wisely without any regrets.
Determining your home equity in a few simple steps
You can figure out on your own how much equity you have in your home by following a simple rule. You can start by subtracting the amount you owe to the bank on all loans, secured by your residence, from its appraised value.
Let’s say you owe $140,000 on a mortgage for your home, which was appraised by the proper authorities at $400,000. Subtract from the estimated value the amount you owe and you’ll find out your equity, which in this case is $260,000.
How to calculate your loan-to-value ratio
Lenders may use many other calculations related to equity, varying from one bank to another, when making decisions about loans and new investments. One common measure bankers use is the loan-to-value ratio or the LTV.
When you or anyone else first applies for a mortgage, this equation compares accurately the sum you need to loan to the home’s market value. If you currently have a pending mortgage, your LTV is based on your loan balance at the moment you apply for it.
To figure out your LTV, just divide your current loan balance, which you can find in your online account, by your home’s assessed value. Then, you can multiply it by 100 to further convert this number to a percentage, for more clarity.
How to increase your equity fast
If your home’s value remains stable for extended periods of time, you can build equity by paying down more of your loan’s principal. If your payments are amortized, this happens by making your monthly payments without any delays.
If you desire to lower your LTV faster than the average rate, consider paying more than you’re required each month. However, you should check if your loan doesn’t carry any prepayment penalties, as those can add up.
Also, you could protect the value of your home by preserving it well-maintained, modern and clean. Smart home improvements like brand new patio furniture and high-tech home appliances can help too. It might be a profitable idea to consult a private appraiser or a real estate professional as well before investing in any significant renovations that you hope will increase your home’s value overnight.
Remember that local economic conditions can affect your home’s value no matter what you plan to do. If house prices increase at fast rates, your LTV could drop proportionately, while falling home values could cancel out any improvements you might bring to the house. But putting time and effort into beautiful furniture is not something to avoid, as you can always reuse it for another property or resell it if you run out of cash.