As a homeowner, you probably know the exact day that your mortgage payment comes out of your bank account. Month after month the funds disappear and in return, you and your family have a home to live in. However making this monthly mortgage payment is not the same as paying your other bills. Every time you contribute to the repayment of the principal of your mortgage, you are effectively increasing the amount of equity you have in your home.
Home equity – This is term gets tossed around a lot by bankers and real estate agents, but what does it mean exactly?
What is Home Equity?
Simply put, home equity is the difference between the appraised market value of your home today and how much of your mortgage you have left to pay back to your lender. This is the amount of your home that you truly “own”.
Of course you technically own your entire home, however if you utilized a mortgage or another form of borrowed funds to purchase your house, your lender secures their interest in the deal by obtaining a lien on your property, using the value of the structure as collateral for the money that you have borrowed. Many homeowners are shocked when they discovered how much equity they have at their disposal, partially due to the rapid increase in real estate prices over the past 5 years. Your home equity may very well be your most valuable asset.
Just in the last year alone, the majority of homes in Kelowna have increased in value anywhere from 5% to a whopping 30%.
How Much Equity Do You Have?
Here is a quick example:
Let’s say that you bought your home for $150,000 and made a 20% down payment using a mortgage to cover the remainder of the cost. You now owe $120,000, which will slowly be paid back every month to your lender. At this point you have $30,000 in equity in your home (your down payment). Several years later, your property’s value has skyrocketed, as you just received an appraisal that valued your home at $300,000.
You have been diligent with your mortgage payments and only have $100,000 left owning. Therefore, the amount of equity you now have in your home is $300,000 (the appraised value) minus $100,000 (balanced owed), which amounts to $200,000 in equity.
Why is Equity an Asset?
The equity you have acquired in your home is indeed an asset and is included in your total net worth. It is possible to borrow against the amount of your home that you “own” allowing you to access further funds from a lender. You can put your equity to work and utilize it for a long list of reasons including investing (perhaps purchasing another home), consolidating other debts, home renovations, or to cover further education costs.
Borrowing Against Equity
There are a few different options or financial tools you can utilize to gain funds from the equity in your home. Two of the most common lending methods are home equity loans, and home equity line of credits.
A home equity loan works like a “second mortgage”, where you receive a lump sum of money, secured by the value of your equity that you have worked hard to build up. Home equity loans are typically easier to qualify for and come with a fixed monthly payment schedule. Once you are approved for one of these loans, you can use these funds as you see fit.
A home equity line of credit works in a similar manner, except instead of receiving a lump sum, you are allocated a maximum spending amount and can borrow as little or as much as you require from that reserve. A line of credit works almost like a credit card, except they usually have a much more favourable interest rate.
Loan or Line of Credit?
The question then becomes, loan or line of credit? This depends on what you plan to do with the equity that you have unlocked from your home. Perhaps you plan on completing a series of home renovations over the next year to your own property. You are not 100% sure exactly how much it is going to cost and you will have to make a series of purchases each month. In a situation like this, a line of credit is going to be a great choice for you, offering flexibility and potential savings on interest payments.
Now consider a second situation where a homeowner wants to purchase an additional home with their newly acquired funds. This second home is in great condition and is ready to rent right away, with little to no renovations required. The only problem is, the homeowner does not have enough for a down payment. In this situation a lump sum is required, which can be used to secure the new home and mortgage, which will be payed back every month with the income earned from renting. Many people dream of investing in a rental property, cottage or second home and are completely unaware that your home equity can make that dream a reality.
If you are one of these homeowners who may be interested in a new property, the team at John Antle Mortgages would love to answer any questions you may have about the process and provide you with the best financing rates possible, saving your hard earned dollars for further investing down the road.
JOHN ANTLE MORTGAGES – KELOWNA’S MORTGAGE SPECIALIST
We specialise in offering mortgage solutions that go above and ‘beyond the bank’. This means we are able to provide flexible solutions at great rates, often better than what traditional banks have to offer. Working with a mortgage broker can open up your options, allow for potentially greater solutions for your situation. We work with a variety clients including first-time buyers, those looking to transition from renting to owning or renewing a mortgage, self-employed business people, as well as investors in rental and/or vacation properties.
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