Owning a home isn’t just about having a place to live; it’s about building memories and potentially saving money over time on increasing rents. One key thing to grasp is your home equity, which essentially represents how much of your property you truly own. This guide will walk you through the process of how to figure equity in your home.
Home Equity 101
Home equity is like the money you’ve earned from your home investment. It’s the difference between what your home is worth now and how much you still owe on your mortgage. As you pay off your mortgage, you build equity, and if your home’s value goes up, your equity does too.
A Simple Formula !
To figure out how to calculate your home equity, just use this simple formula:
Home Equity=Current Value of Your Home−Amount You Still Owe on Your Mortgage
- Find Out How Much Your Home is Worth:
- Get an expert opinion: Hire a pro to tell you how much your home is worth. Your realtor for example can be helpful.
- Online tools: Use websites that give you an estimate based on recent home sales in your area and local market trends.
- Check How Much You Still Owe on Your Mortgage:
- Look at your mortgage statement: Your monthly mortgage statement has the info you need.
- Ask your mortgage lender: If you’re not sure, contact your lender for the most accurate details.
We enjoy tracking the Equity in our home each month. See, we’re new home owners and each month that we make a Mortgage payment and/or a Mortgage Pre-Payment, we’re able to see an increase in our Home Equity. Our home, for example is valued at about $800,000 and we owe about $500,000 on our Mortgage. Thereby, our Equity in our house is about $300,000.
You can calculate the equity in your home on paper, on a spreadsheet or even an online calculator like this one by Nerdwallet.
Things that affect your Home Equity
Mathematically, its quite simple. You (or the market) either increase the value of your Home or you lower your Payments over time.
- Home Improvements:
- Upgrading your home can make it worth more, increasing your equity. Keep in mind, however, that the work you do in your home may not be proportional to the amount your home value increases by. We, for instance, got some work done in our basement floor which does not translate into a higher value for the house.
- Market Changes:
- The real estate market is always changing, and that affects your home’s value.
- Making Mortgage Payments:
- Every time you make a mortgage payment, you’re building equity by lowering the amount you owe. We love this. We often make Mortgage Pre-payments in addition to our monthly mortgage. Love to see the amount owed go down over time.
- Appreciation:
- As time goes on, your home might become more valuable due to things like new developments in your neighborhood or improvements in local amenities. Neighborhood gentrification is a good example where the real estate in an area goes up due to urban development. We’ve also seen prices of homes go up due to the addition of transit services in an area.
- Depreciation:
- On the other hand, if your home isn’t well-maintained or if your neighborhood isn’t doing well, your home’s value might go down.
So, what do I do with my Home Equity ?
Ways to Use Your Home Equity:
- Nothing:
- This is exactly what we do. We don’t want to pay 35% of our take home on our Mortgage and we don’t want to own a rental just yet. So, track our Home Equity monthly. We also don’t consider our Home Equity in our Net Worth calculation. Remember that Net Worth calculation is personal to you.
- Home Equity Loans:
- Use your home equity as a guarantee for a loan with lower interest rates.
- Home Equity Lines of Credit (HELOC):
- Open a line of credit based on your home equity for various financial needs.
- Buying a Second Property:
- Use your home equity to help pay for the down payment on another property. This could be a rental property or you could consider converting your current residence into a rental and using the equity to buy another primary residence.
Concluding
Knowing and keeping track of your home equity helps you make smart financial choices. Now that you know how to calculate the equity in your home, you can track it regularly. It will incentivize you to keep on top of your mortgage payments and get a good feel on your investment. Keep in mind that the home equity on your primary residence is not a liquid asset unlike Savings or stocks. You may not to sell the property or take a loan out to realize the equity in your home. Generally speaking, your Home Equity will constitute as an Asset and help you build your net worth. If you’re interested in learning about Net-worth of Canadians and where you stand in relation, here’s a post that you might enjoy.