Home equity is the value you hold in your home. So if you take the current market value of your home and subtract any debts on the property (like a mortgage balance or any liens), the resulting amount is your home equity.
But there’s a lot more to know about home equity than the textbook definition!
We want to explain the importance of home equity and show you how you can use it to your advantage.
Whether you’re a homeowner or a buyer with dreams of homeownership, here’s what you need to know about home equity.
Why Does Home Equity Matter?
Home equity matters because it directly impacts your net worth. Your net worth is the value of all your assets (real estate, bank accounts, investment accounts, etc.) minus all your debts (mortgages, student loans, credit card debt, etc.). Over time, you want to see your net worth grow as you acquire assets and pay off debts. In general terms, the greater your net worth is, the more financially stable you are.
Your net worth might not play a major role in your day-to-day life. But when you need to make a financial move, like applying for a loan, for example, your net worth will be scrutinized. Lenders like to see that potential borrowers have a solid net worth before issuing a loan. Your net worth can even help you get a lower interest rate on loans!
Your home equity is also important when you’re considering selling your home. Your proceeds from the sale will be your home equity minus closing costs. So the more home equity you have, the more you can make on the sale.
How to Find Your Home Equity
While the home equity formula is simple, actually calculating your home equity can be a little complicated because you need to know the current market value of your home. And that number is a moving target, based on recent sales of similar homes.
As a shortcut, some homeowners check their Zillow Zestimates, but Zestimates can be wildly inaccurate. If you just need a ballpark figure that can be up to 20% off, the Zestimate might work just fine for you. But if you really want to know what the true value of your home is in today’s market, you can always contact the professionals at Sequoia Real Estate for a free, no-obligation value estimate.
Then you just need to know how much you still owe on your property. If you have a mortgage, the remaining principal balance will be on your most recent statement. And if you have any other debts, like a mechanic’s lien (for failure to pay a contractor for work done on the home) or a tax lien (for failure to pay taxes), you will have paperwork showing the amounts due.
What Can You Do With Home Equity?
There are a few different ways you can tap into your home equity to put cash in your pocket.
First is a home equity line of credit (HELOC). A HELOC is a revolving line of credit that you can use and repay as needed. With a HELOC, you can borrow cash from your home equity for things like home renovations. As a bonus, renovating your home can increase the value of your home, which means your home equity goes up even after you’ve used some of it!
Another option for using your home equity is a cash-out refi. This is when you refinance your existing mortgage to pull out a large lump sum of cash. Part of the refi process is getting a new interest rate and loan term, so you’ll want to pay attention to interest rates before refinancing. This can be a good option if you need cash to go back to school, start a business, make a down payment on an investment property, or pay off high-interest debts.
HELOCs and cash-out refis both allow you to access a portion of your home equity. The percentage of your total home equity that you can access depends on additional factors like your credit score and debt-to-income ratio. Selling your property is the only way to cash out all your equity.
Do You Need to Know How Much Your Home is Worth?
If you need an accurate home estimate to calculate your home equity, contact Sequoia Real Estate today. Our experts will “run the comps” to find the recent sales prices of properties that are comparable to yours. There is no charge for this service. We just want to make sure homeowners are well-informed so they can make sound decisions in the real estate market. We look forward to working with you!