Understanding Home Equity and Why It Matters

Understanding Home Equity and Why It Matters

  • Karine Sewart
  • 11/15/22

There’s a lot that can be done with a person’s home equity, from building it up to borrowing against it. But how do you figure out what your home equity is, and why is it important? Read on for a thorough explanation of why to pay attention to your home equity. But first, here’s why you should be interested in your home equity if you’re buying or selling in Wisconsin.

The river views that cut through Mequon make it a beautiful place to live. Its prime waterfront location and great nature views result in some of the most expensive real estate in the U.S., with single-family detached homes being the most popular home type. Those living or looking in Cedarburg can also expect many single-family homes, and properties in the area appreciate 4.13% annually. Another great village in Wisconsin to search is Shorewood, which is one of the most expensive areas in Wisconsin. Residents love the area for its community focus and diverse architecture. With this in mind, here’s why home equity is important.

Defining home equity

As a homeowner, you probably used a mortgage to finance your home. When you pay off your mortgage, home equity is the portion that you have already paid off, or what you already own. For example, Mequon real estate has a median value of $472,888. If you owe $250,000 on your mortgage loan, then you have $222,888 of equity on your home.

There are a few ways to build your home equity, two of which you’re already doing. The monthly mortgage payment goes towards reducing your balance. As your balance decreases, your home equity grows. Additionally, home appreciation will increase the value of your home. In Mequon, homes appreciate annually by an average of 3.64%. Although your home could depreciate, property values usually increase over time. This creates equity beyond any money put into mortgage payments or repairs.

Why it’s important

Building home equity is important because it increases your net worth, which is calculated by subtracting your assets (like a home) from your liabilities (like a mortgage). By building home equity, you create a lower loan-to-value ratio (LTV). When your LTV is 50% or less, then you’re equity rich. Once you have this equity, you can use it for a number of things. For example, you can borrow from your equity, invest it somewhere else, or sell your home for a profit.

If you have good home equity and you sell your home for a profit, it means that the proceeds of the sale go towards paying off your mortgage, and the rest you can use toward something else, like buying another home. When borrowing your own equity, you free up what you’ve already built by taking out a home equity loan or a home equity line of credit.

How to build home equity

There are several ways to build home equity when thinking about buying Shorewood houses for sale. One way is to make a large down payment. A down payment is a part of your mortgage required at the beginning of your home purchase, and usually makes up 3-3.5% of your home value. If you can make a larger down payment, then that amount instantly goes towards your home equity.

Another way to build home equity is to pay off your mortgage more quickly. You can do this a few different ways. A simple way is to pay more than what’s required each month. When doing this, be careful of any prepayment penalties attached to your mortgage agreement. By paying off your home faster, you’re also saving on costs related to interest. Another way to pay off your mortgage faster is to switch to biweekly payments when you split your monthly payment into one payment every two weeks.

If you don’t want to worry about prepayment penalties or you’re in a good financial place to handle a larger mortgage payment, you can also refinance your mortgage. Through refinancing, you can pay off your loan earlier than planned, and save a large amount of money spent on interest. When refinancing, look out for closing costs for the new loan.

One way to build equity without increasing your mortgage payment is to invest in projects and upgrades on your home with a good return on investment (ROI). Make sure to research the type of projects that have good ROI, as well as the local market trends and home valuations in the area. Cedarburg homes for sale have different prices and appreciation rates when looking in different neighborhoods, so researching averages may not be the most accurate way to plan out a renovation.

How to use home equity

There are several ways to use home equity once you’ve tapped into it. As stated before, you can buy another home with the profit of your sale. When looking for a property in Wisconsin that is worth the investment, partner with a local and experienced realtor like Karine Sewart. A realtor will know how to navigate the real estate market trends and can provide you with connections to services you may need, like a mortgage lender when taking out a home equity loan.

Having plenty of home equity is also helpful in emergency situations, such as a hospital visit or a car repair. This gives you a cushion to fall back on for unexpected situations, but ideally, it’s best to have a separate emergency fund for accidents. You can also use home equity towards your retirement, through a reverse mortgage. The amount of money you receive is dependent on your amount of equity, age, and current interest rates.

Ready to build your home equity?

Your home equity provides you with several different avenues, whether that be to build it up or use it towards another home. When you’re ready to start building your equity, or you’re interested in using it to invest in a new property, contact trusted local agent Karine Sewart to guide you through the process.

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