Learn what incentives you can use right now to revitalize your current financial situation

Why 'Knowing Your Options' are important

In the United States, property values have increased by 42% since the epidemic started, according to an analysis from data analytics firm Black Knight. That indicates that millions of homeowners have thousands more in equity than they had a few years ago. If you belong to this group, you might be able to use the equity in your house to further your financial or personal objectives. But in order to achieve that, you must first comprehend what home equity is, how it operates, and how you can use it to your advantage. Here’s what you need to know.

Definition of Home Equity

Home equity is the current value of your house less the balance of the mortgage loan you currently have. You have $150,000 in equity, for instance, if your house is worth $300,000 and you owe $150,000 on your mortgage.

How does equity in a home work?

The difference between your home's current market value and your mortgage balance is how much equity you have in it. Your equity amount may change over time for the reasons listed below:

Home Values fluctuate

Home values may rise, sometimes substantially, as many homeowners around the nation have discovered. Even if your mortgage balance hasn't changed, if the market value of your home increases, you could gain a sizeable amount of equity.

Here's an Example...

Consider the scenario where your house was worth $300,000 and you owed $150,000 on the mortgage, leaving you with $150,000 in equity. Your home is now worth $350,000 due to the soaring cost of real estate. Your equity would rise to $200,000 even if you did nothing to reduce the mortgage balance.

You should be aware that home equity might also decrease if the value of your house decreases faster than you can pay off your mortgage. If you have a mortgage balance greater than the value of your home, your equity will increase naturally as you pay down your mortgage balance with each monthly payment. But some people are laser-focused on paying off their mortgages early. If you make extra payments, increase your monthly payments to more than the minimum, or use windfalls to make balloon payments against the principal balance, you can decrease the balance and increase your equity.

For example, let’s say you own a $300,000 home and currently owe $150,000. You received an unexpected windfall of $5,000. By applying that full amount to your mortgage, you reduce the balance by $5,000, and you now owe just $145,000. As a result of the lower balance, your equity increases to $155,000.

Increasing your home equity by paying down your loan balance has another perk: once you hit 20% equity, you can request the cancellation of private mortgage insurance (PMI), an added monthly cost your lender charges on FHA and conventional loans when you put less than 20% down.