Home Equity Guide

What is Home Equity and why is it important?

Compliments of Maria Borea Puccella The "Lunachik" Realtor

What is home equity, anyway?

Home equity simply refers to the difference between the value of your home and the remaining balance on your mortgage or mortgages. Naturally, since home values fluctuate, your home equity changes according to the appraised value of your home. In addition, as you make mortgage payments and pay off your loan, you are increasing your home equity.

Why is home equity important?

So why is knowing your home equity important? Home equity is considered an asset and can be used for investments in the future like buying an investment property, retirements, or home improvements.

If you sell your home, your equity could be used to pay your closing costs.

Any leftover equity would be yours to keep for savings, investments, or a down payment on another home.

Private Mortgage Insurance (PMI) is typically required for all conventional loans with less than 20% in home equity. The amount you pay in PMI varies according to how much home equity you have. So the higher your equity, the lower your PMI premiums will be.

The interest rate you pay also depends, in part, on your loan-to-value ratio. If you have just 5% or 10% in equity, your interest rate will be slightly higher then someone with 20% equity.

3 Ways To Tap Into Your Home Equity 1. Re-Financing: Your home is more than just a place to live it's also an investment. It can be a handy source of cash for emergencies, repairs, and upgrades.

So why do you want to refinance your mortgage?

There are 2 main reasons - lowering the overall cost of your mortgage or releasing some equity that would otherwise be tied up in your house.

There are two types of re-fi loans Cash-out refinancing pays off your old mortgage in exchange for a new mortgage. This is ideal for homeowners who need a substantial amount of money for a specific purpose. Pros are the ability to cash out as high as an approx. 125% loan-to-value ratio. The amount above and beyond the mortgage payoff is issued in cash just like a personal loan. Cons are these types of cashouts typically come with higher interest rates and other costs.

Rate and term refinance is when you effectively swap your old mortgage for a new one. In this type of refinancing, no money changes hands, other than costs associated with closing and funds from the new loan paying off the old loan. Many homeowners will take advantage of refinancing their homes when interest rates drop to lower their monthly payments. Pros are a lower monthly rate and total cost. Cons are high closing costs, typically 2% to 3% of the loan amount. *with either type of refinancing loan you should plan to live in your house for one year or longer

Re-financing continued Your options for refinancing depend on your credit profile as well as your home value, which is based on your local market. If you’re thinking about refinancing, you should use a refinance calculator to determine if it’s the right time for you.

Most conventional lenders require at least 10% home equity for a refinance. If you have less than 20% in home equity, you will have to pay PMI, which will add to your monthly payments. However, if you are already paying PMI, or if your interest rate is higher than today’s mortgage rates, a refinance may still make sense.

If you are interested in refinancing, you will need to have an estimate of your home value before you apply, and in most instances (although not always required) an appraisal as well. A realtor can give you an idea of how much your home is worth based on recent sales of comparable homes

2. Home equity loan Home equity loans are like a second mortgage that allows homeowners to borrow against the equity of their home to use towards buying a second home or an income property. The loan is based on the difference between the homeowner’s equity and the property’s current market value. Many lenders provide real estate investors with up to 80% of the home’s equity value! Pros are the loan cost less than cash-out refinancing and easier to obtain. Cons are they usually have interest rates higher than mortgage rates, you will have two liens on your property instead of one, and if you don't need to use the full amount you are stuck paying interest on an unused portion.

Pros are they typically have fixed rates, since it's a separate loan you don't add years to your current mortgage and you get a large sum of money to spend as you choose.

To determine whether you qualify and how much money you can borrow, a lender will have your home appraised.

You need to know your Loan to Value Ratio (LVR) by subtract the remaining balance of your primary mortgage from 80% of the appraised value of your home.

To qualify for a home equity loan, your DTI cannot be higher than 43%.

DTI = Total Monthly Debt Payments / Gross Monthly Income

3. Home equity line of credit (HELOC) A HELOC is like a credit card that's tied to the equity in your home. For a set period of time known as the draw period, you can generally borrow as little or as much of that credit line as you want, although some loans do require an initial withdrawal of a set minimum amount.

You may be required to pay a transaction fee each time you make a withdrawal or an inactivity fee if you don't use your credit line at any time during a predetermined period. During the draw period, you pay only interest on what you've borrowed. When the draw period ends, so does your credit line. You start paying back the principal plus interest when the repayment period kicks in.

HELOCs typically have adjustable interest rates. The APR for a home equity line of credit is calculated based on the loan's interest rate.

Pros are they provide drawable cash to cover ongoing, unpredictable expenses instead of borrowing a set amount of money in traditional home equity loans and It does not impact your mortgage rate or term. Cons are adjustable interest rates and transaction fees and like the home equity loan, creates a second lien on your home.

So How Can I Help?

Your home's equity can be a long-term strategy for building wealth, making home improvements, funding investments, starting a business, or even using it for loan consolidation

So get in touch with me and let me do a complimentary home equity analysis and find out how much equity you have in this current market