Monday January 25, 2016
Whether you’re in the process of buying your first home or are thinking about doing so in the future, there are a number of real estate terms that you’ll soon become familiar with – equity being one of those terms. When you buy a home, you gradually build equity, which can prove beneficial to you down the road.
What is Equity and How Does it Work?
Equity refers to the portion of your home’s value that actually belongs to you. You may be thinking that if your name is on the deed, you own 100% of the home value, but that’s not necessarily true. If you’re financing your home, then it’s actually the bank that owns the majority of the equity—that is, until you get closer to paying it off.
For example, say you buy a home for $200,000, you make a $10,000 down payment and your mortgage company finances the rest. At that point, you only have $10,000 in equity. As you make mortgage payments and pay down your principal balance, your equity increases. The longer you make mortgage payments, the more equity you’ll gain. In this sense, making a monthly mortgage payment makes a lot more sense than paying thousands of dollars a year on rent, doesn’t it?
Buying a New Home
There are many ways in which you can use your equity down the road. For instance, let’s say you spend 10 years or so in your home before you decide it’s time to move. Maybe you need a larger home to accommodate a growing family, or perhaps you’re being relocated for work. Either way, you’ll sell your home and pay off whatever is left on your mortgage. The money you’re left with is your equity value, which you can then use towards a down payment and other relevant expenses for your new home. As a result, you’re able to enjoy a lower monthly mortgage payment and borrow less, which means you save on interest in the long-term.
Taking Out a Home Equity Loan
Your equity can work in your favor should you need to borrow money for a large expense at any point during your journey as a homeowner. For example, let’s say you need to finance your child’s college education. Rather than taking out an education loan, you can use a home equity loan to borrow against your home’s current equity (this is also known as taking out a second mortgage). When you take out a home equity loan, you pay yourself back plus interest instead of paying back an outside financial institution.
Helping Fund Your Retirement
Your equity can also work to your advantage when you decide to retire. Specifically, you can tap into your equity using what’s known as a reverse mortgage. You become eligible for a reverse mortgage as a homeowner once you hit the age of 62. Specifically, a reverse mortgageallows you to stop making mortgage payments on your home and draw from your equity to fund your retirement expenses. Sure, it’d probably be a long time before you would need to even consider a reverse mortgage, but it’s always smart to plan ahead.
As you can see, there are a number of benefits to having equity in a home. So if you’re sick and tired of throwing your money away on rent each month, why not look into buying a home so you can begin making your money work for you? Smith Douglas Homes builds quality homes in the places you want to live. Get in touch with a New Home Specialist today to start building home equity today.