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Are You Equity Smart?
Home equity is the market value of a homeowner’s unencumbered interest in their real property, that is, the difference between the home’s fair market value and the outstanding balance of all liens on the property. The property’s equity increases as the debtor make payments against the mortgage balance, or as the property value appreciates. In economics, home equity is sometimes called real property value. Home equity is not liquid. Home equity management refers to the process of using equity extraction via loans, at favorable, and often tax-favored, interest rates, to invest otherwise illiquid equity in a target that offers higher returns.
Homeowners acquire equity in their home from two sources. They purchase equity with their down payment and the principal portion of any payments they make against their mortgage. They also benefit from a gain in equity when the value of the property increases. Investors typically look to purchase properties that will grow in value, causing the equity in the property to increase, thus providing a return on their investment when the property is sold. Home equity may serve as collateral for a home equity loan or home equity line of credit (HELOC).
Many home equity plans set a fixed period during which the homeowner can borrow money, such as ten years. At the end of this “draw period,” the borrower may be allowed to renew the credit line. If the plan does not allow renewals, the borrower will not be able to borrow additional money once the period has ended. Some plans may call for payment in full of any outstanding balance at the end of the period. Others may allow repayment over a fixed period, for example, ten years. HELOCs or a home equity loan can be used to consolidate debts to a lower interest rate. Homeowners will often use home equity to pay off other personal debts such as a car loan, taxes or credit cards. HELOCs can also be used for Home Improvements, To Pay for an Education, to Invest, to Take a fancy vacation, to buy an expensive toy etc.
Steps to Building Equity in Your Home
- Make a Big Down Payment. Your home equity represents how much of your home you actually own.
- Focus on Paying Off Your Mortgage.
- Pay More Than You Need To.
- Refinance to a Shorter Loan Term.
- Renovate the Inside of Your Home.
- Wait for Your Home’s Value to Rise.
- Add Curb Appeal, i.e., a garden, green grass, flowers, etc.
Banks restrict how much equity you can take
Homeowners used to be able to borrow 100 percent of their equity, today, most lenders limit equity borrowing to 80 percent of your cumulative loan-to-value. For example, If your home is valued at $300,000 and you owe $200,000, then you have $100,000 of equity. At 80 percent cumulative loan-to-value, the total amount of outstanding borrowing would be limited to $240,000 ($300,000 x 0.80 = $240,000). You must retain 20 percent equity in the home, which is $60,000 ($300,000 x 0.60 = $60,000). So, subtract the amount you have to retain from your total equity, and you’d be able to borrow $40,000 ($100,000 − $60,000 = $40,000).
BE CAREFUL! Some owners fall into trouble when they do not make their mortgage payments which means that the mortgage lender can foreclose on your home. You save your home from foreclosure by a loan modification while contesting the foreclosure in Supreme Court, or by filing a Chapter 7 or Chapter 13 bankruptcy. Never work with investors, because they are PREDATORS, who want to steal the equity in your home. They believe that you are stupid and uneducated and they often target Blacks, Hispanics, and other minorities.
If you would like to be contacted by one of our agents or for more information regarding our affordable real estate services please complete the form on this page and we will respond to your inquiry within 24 hours.
Equity Smart Realty Inc.26 Court St #701
Brooklyn, NY 11242
Telephone: (888) 670-6791