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What Is Home Equity?

Homeownership can be a source of security and stability, and it can build wealth for the owner over a period of time through equity. But what is home equity and how can it be used?

What is equity?

Basically, equity is the difference between a home’s market value and the amount you still owe on your mortgage loan. Equity is the portion of a home’s current value that the owner possesses. To calculate home equity, subtract the amount of the outstanding loan balance from the current value of the home. In other words, you’ll have 100% equity in your home once the mortgage loan is paid off.

How does equity accrue?

Equity accrues as the principal balance of your mortgage loan decreases and the value of your home increases. Making regular and timely payments will steadily bring the amount of the mortgage loan down, and with sturdy appreciation, the equity of the home will steadily increase. While property values can go up or down over time, the likelihood of the value increasing is greater, therefore increasing the overall property value and the equity. In addition, if the home is located in a neighborhood where property values are increasing, the amount of your equity will also increase. Making regular improvements to your property may also increase its value.

In addition, you can:

  • Pay more than the monthly mortgage payment, if possible;
  • Make regular improvements to your home;
  • Educate yourself on changes that may boost your equity.

How can I use my equity?

Homeowners can leverage their equity as collateral to secure low-cost funds for their financial needs. Here’s how.

  • Home equity loan—allows you to borrow a certain amount of money against the home’s current equity for a fixed rate over a fixed period. These loans are typically used to finance large expenditures such as home repairs, big-ticket purchases, college tuition or pay off high-interest debt.
  • Home equity line of credit (HELOC)—a revolving line of credit that allows you to borrow up to a certain amount over a period of time while paying off the balance. As you repay your outstanding balance, the amount of available credit is replenished, much like a credit card.
  • Cash-out refinance—allows you to get a mortgage loan that is larger than the existing mortgage and then pay off the existing mortgage loan. The remaining money can be used for any purpose.

Other ways to use equity:

  • Pay off credit card balances. Rates on home equity products are typically much lower.
  • Pay for bills or projects with home equity funds instead of using credit cards or personal loans.
  • Possibly cancel your private mortgage insurance earlier than required.

Overall, the biggest benefits of building equity in your home are paying off the original mortgage loan and borrowing money against it. For more information on building equity and home equity loans, call First Keystone Community Bank at 570-752-3671 or visit www.fkc.bank.

Written by Brenda Grasley

Brenda is the Consumer Loan Manager for First Keystone Community Bank.

Post Category:

Posted On:

August 15, 2023

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