Many people want to leverage the equity in their homes. They may want to use the money to start a new business or to go on a big vacation. Some use equity to pay for their children’s college education. And some simply want to know how much money they will profit when their home gets sold. There are a few ways that home equity is increased over time. Learning this is helpful to learn how to take equity out of your home. Calculating your home’s equity is very simple, and here are three steps to show you how to do it.
Step One: Assess the Market Value of Your Home
Getting an accurate picture of the amount of equity in your home means that you need to know what the market value is. Many times homes appreciate which can lead to a higher amount of equity than you imagined. In the short term, however, the value of the home can be lower. It’s important to work with professionals in the real estate market to get an accurate market value for your home right now. You may have more or less equity than you think.
Step Two: Subtract The Amount Left to Pay on Your Mortgage
Once you know the value of your home, it’s easy to calculate the equity. You’ll need to call your mortgage lender to find out what the payoff balance is. This is the estimated settlement statement and is not likely to be the exact same amount as you see on your monthly mortgage statement. Subtract the amount on the settlement statement from the value of your home. Of course, if your mortgage is paid off, then you have 100% equity and the value of the equity is the same as the market value of your house.
Step Three: The Difference Equals Your Equity
The difference between the amount left to pay on your mortgage and the amount of the settlement statement is your equity. So, if your home is worth $500,000 and your settlement statement amount is $250,000, then you have $250,000 in equity. You can use this information to leverage your equity in many different ways. It also helps you get an idea of how much your profit will be if you sold your home at market value.
The Facts About Home Equity
Most people think that equity is only created the more you pay off your mortgage, while this is one way that equity increases, it isn’t the only way. Here are some important facts about home equity.
It Increases the Longer You Pay Your Mortgage
Of course, the longer you pay your mortgage, the more your equity increases. This is also because you start paying on the principle of your loan and not just the interest. Some people make an extra payment each year because it dramatically reduces the life of the loan and the amount of interest they pay in the long run.
It Increases as Your Home Appreciates With the Market
Your home value also appreciates as the market goes up. This means that your equity rises because appreciation increases the difference between what you have left to pay off your loan and the value of the house. The higher the home value, the more equity you’ll have in your house.
It Increases When You Make Big Home Improvements
They say that kitchen and bathroom remodeling gives you the most ROI when it comes to your home’s value. Making big home improvements helps to increase your equity. When you are making changes to the interior or exterior of your home, make sure you consider the impact these changes will have on your overall home equity. If you plan to sell soon, making changes that impact your equity will not only help you sell more quickly but can also increase your profits.
Final Thoughts
Using equity in your home is a smart move for many people. The loans are usually lower interest than many other types of lending. It can help you remodel your home, take a big vacation, or invest in a business or college education. Getting the most out of the equity in your home means understanding how market changes, upgrades to your home, and how much you’ve paid off can all impact your home equity.
