3 Benefits of Growing Equity in your Home
What is equity (real estate)? Let's discuss 3 things that you should know.
There are many benefits of purchasing a property, whether it be for investment purposes or simply as a place to live in that you own. One of the benefits of home ownership that some people may not realize is the growth of equity. If you own a home and the market improves, or the home value goes up – your equity rises. Equity may not be physical money in the bank, but there is a lot of value in having equity. There are many uses for this equity, whether it be the ability to take our low interest loan or even to purchase additional property. So, what is equity and what are the main 3 benefits of growing equity in a home?
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1. More Equity Means Higher Home Value
Simply put, the more equity there is in your home, the more your home is worth and the more profit you can potentially make. If you purchase a home for $100,000 and then after a few years, the market improves, and it is suddenly valued at $500,000 then this means that the property has $400,000 in equity. It is now worth $400,000 more than it did when you bought it. So, you could then sell the home and pocket the $400,000.
One way of explaining equity by Quicken Loans is that it is the difference between what you own on your mortgage and what your home is worth. So having your home rise in value will make your equity go up, and also paying off your loan quicker will also mean you have more equity. The value of the equity being that when you sell the home, the more equity you have, the more money you will walk away with.
2. Equity Can be Used in Place of Credit Cards and Loans.
Although having equity is not the same as having money in the bank, the more equity you have in your home, the more leverage you have with the banks to be able to take out loans. Many people with high equity will borrow money against this equity to use for things including home renovations, pay off a large debt, a big purchase such as a car, or even to send their children to college.
Home equity can be used as a financing option and is often a much more cost effective method than the alternatives which will often be credit cards or personal loans. Home equity loans will have an average interest rate of only 6.36%, while credit cards and personal loans will be closer to 12% – 15% (source: Bankrate).
3. Ability to Invest in More Properties
One of the biggest benefits of having equity in a property is that it directly enables you to invest in more properties. You can use equity in an existing property to use as a down payment for a second property. This means you don’t need to save up tens of thousands of dollars in cash in order to invest again, which can open up opportunities that would otherwise not have been possible. This second property can become an investment with rental income, so it really helps you start to grow your investment portfolio.
Even if you did not have the intention of investing when you purchased your home, it is important to be able to set yourself up for the future and your retirement. Not everyone will be able to afford to purchase multiple homes at the one time as this would require a lot of money upfront. However, once you build home equity, then you will use the value of the equity as a down payment. The banks see you as being lower risk as you have value in an asset (your existing home), which is why they are happy to give you a second home without requiring as much upfront money. The more home equity you have, the more you will be able to borrow and the better an investment property you will be able to get (source: Value Penguin).
People may not really understand the true benefits of equity as it is not something that you can physically see or touch. But there are a lot of benefits to owning a home with equity, and the more that you do to raise the equity of any properties you own, the better. Equity is more than just raising the value of a home, banks view equity as a sort of invisible savings account, so it could be seen that equity is a stepping stone to growing your wealth and real estate portfolio. Home equity is something that only homeowners have, and it is one reason why many people will look to purchase their home rather than just stay a renter forever.
Charles is the founder of infoSpike.com. He enjoys real estate investing, marketing, and personal finance. Read more about Charles here.