Fast-rising home values have more homeowners sitting on newfound home equity. Home equity is the current value of a home minus the amount of mortgage debt against it. Home equity represents valuable savings, but it can also be a valuable financial tool. Homeowners often tap into their home’s equity to pay for various other expenses, for an investment like buying a second home to use as a rental property, home repairs, remodeling, or to pay off other, more expensive debt.
The Sacramento metropolitan area, which includes Roseville, Folsom, and Elk Grove, ranked as only the eighth-most lucrative home sales market in California. A recent report by Redfin found that Sacramento was the number-two metropolitan area in the country for people relocating from other regions. Knowing this and taking into consideration historically low interest rates, you should consider taking advantage of your home’s equity. But first, let’s see how it works.
What Is Home Equity?
Home equity is the current market value of your home, minus what you owe. You’re looking for a positive number. Any gain comes from the following:
- Paying down the principal balance on your loan.
- An increase in market value over time.
Why Do Home Values Appreciate?
Local market conditions often drive home values, so it’s important to note that there is no guarantee that a home will appreciate. However, our 2021 Forecast shows that today’s housing market is strong. Let’s look at what’s driving this growth:
- Housing Demand
- Housing Supply
How Does Home Equity Work?
Building home equity is a bit like investing in a long-term instrument, like bonds. Your money is, for the most part, locked up and not spendable. There are some ways to tap into your home’s equity, but wealth is created over the years. As a rule, building home equity is a slow climb, at best. In the third quarter of 2020, the reported average homeowner gained approximately $34,000 in equity during the past year in California. This marks the largest average equity gain since the first quarter of 2014, according to CoreLogic.
How Can I Take Advantage Of Home Equity?
- Cash-Out Refinance:
A cash-out refinance loan is a new loan, usually one with better terms, used to pay off and replace your old loan. Generally, the loan amount is larger than the remaining balance on your current mortgage. In order to get cash from the equity in your home, you refinance with a cash-out mortgage. The cash you receive may be used on anything from home improvements to college tuition. You may be able to borrow up to 85-90% of your home’s value.
- Home Equity Loan:
The home equity loan, also known as second mortgages, are loans where your home’s equity is used as collateral. You’re still responsible for making regular monthly payments to pay back the money you borrowed. The home equity loan is also distributed in full such as when you first bought your home.
- Home Equity Line of Credit:
A home equity line of credit is like an equity loan; however, think of a HELOC like using a credit card, where a maximum loan amount is determined, and you take out as much money as you need as long as you don’t surpass the limit. HELOC loans also give you a draw period from which you can continuously draw money out as required, usually up to 10 years. After the draw period, you enter the repayment period, which varies from lender to lender.
- Selling Your Home:
When you decide to sell your home, the equity you’ve built over time will come back to you in the sale. For example, if you paid off your $200,000 mortgage and sold your home for $350,000, you would receive approximately $150,000 after closing, not factoring in realtor expenses and other expenses.
If you plan to take advantage of your home’s equity, or have questions about it, schedule a consultation with us. In that case, we can help you understand your particular situation and direct you to the best plan for you.
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