Home equity can be an important part of a person’s overall plan for their family or retirement. But just like insurance, retirement savings, and an emergency fund, you have to make sure that you are making the most of it! Here are some tips on how to do just that.
Home equity and why it’s important to keep track of
Home equity is the difference between what you owe on your mortgage and what your house is worth. This number can be an important metric for homeowners, as it represents the amount of money available to pay off your loan if desired.
Home equity is not the same thing as market value. There are many factors that affect this number, including how long you’ve lived in your home and whether or not you’ve taken out cash advances against the loan. Market value will fluctuate with market trends, whereas home equity will remain fixed unless something changes within the lending industry or outside of it (such as a natural disaster).
How do you calculate your home equity?
Calculating your home equity can be a complicated process, but here’s the gist: first, take the current value of your home and subtract your mortgage balance. This will give you an idea of how much money you would get if you sold your house today.
Your goal is to make sure that the number gets bigger every year as the market increases and as long as nothing else happens with your house (like repairs). If this number decreases, then it means that since last year, there has been a decrease in value for whatever reason (like repairs).
You should also keep track of any improvements made to the house over time so that when selling time comes around again, those improvements can be taken into account and added back into what was paid out at purchase time.
What is an effective way to put that number to use?
The next step is to think about what you could do with that amount of money. This can be anything from investing in property, paying off debt, saving for the future (like retirement or children’s college education), or even using it to fund a medical procedure that you might not be able to afford otherwise. What would you do with your home equity?
What are ways you can increase your home equity?
There are several ways to increase your home equity. One of the most straightforward ways is by paying off your mortgage faster. If you have a fixed rate mortgage and can afford to pay more than the minimum monthly payment on your loan, then do so! By increasing your monthly payments, you’ll reduce the amount of time it takes to pay off that debt—and once it’s gone, all those funds will be yours again.
Another way to increase your home equity is by investing in repairs or improvements for your house. You may not want to spend money on something that doesn’t add value right away (like an addition), but if there’s something else wrong with it—like an old roof or poorly insulated walls—then it might be worth looking into options like installing solar panels on top of new shingles so that they last longer before needing replacement again down the road! The more energy efficient appliances/devices are installed early on as well; these tend not only save money but also increase property values down
Make Sure your Refinance is Worth It
The lure of a lower interest rate or getting cash out of your home may seem exciting, but you should make sure that a refinance is worth it for you. Ask yourself some of these questions and analyze the numbers so that you are well informed and able to speak to your lender about your concerns.
Unless you refinance with a shorter term (15 year vs. 30 year) mortgage, you are basically resetting your years of payments to zero. For example, if you have been paying into your mortgage for 10 years, when you refinance, you reset the term to 30 years and will be starting over and paying for a longer period of time.
You will want to analyze how much you will be saving in the long run and make sure that you can also recoup any up-front costs that you may incur.
How long do you plan on living in your current home? Is it long enough so that the monthly savings will pay you back for the up-front costs and then save you money over the remaining years?
What are the current interest rates? Can you get at least a 1% reduction in your interest rate? If your original montage is an Adjustable Rate Mortgage (ARM), can you now refinance to a fixed mortgage? This could save you money in the long term.
If you are doing a “cash-out” refinance, are you prepared to have the closing costs taken out of the amount you are expecting to receive? How “long-term” is the debt you will be paying off? For example, it is not wise to pay off a 5-year car loan with this cash since you will now be paying on it for 30 years.
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PRMI – Great Lakes has been helping clients purchase homes since 1998 and is backed by one of the most established mortgage lenders in the county with a nationwide presence. We offer a variety of loan programs and service the greater Wooster, Ohio area – including 17 nearby counties. Are you looking for a trusted lender? Contact us by phone at 866.888.7902 or email Matt Shanlian at email@example.com.