Purchasing a home entails substantial capital. You have to think about the down payment as well as the equity that comes after. Fortunately, this type of asset is considered an investment because you can use the money that you put into it later on.

What is Home Equity?

Simply put, home equity is the difference between how much you owe on your mortgage against the worth of your house. For instance, if you still need to pay USD$100,000 on your mortgage for a USD$200,000 home, you have USD$100,000 equity.

As you keep up with the payments for your mortgage, your equity would rise. Additionally, if your house’s value increases, your equity would also jump. Conversely, equity would decrease if your home’s price drops faster than the speed that you’re paying the principal balance.

Top 3 Ways to Use Home Equity

As mentioned above, you can take advantage of property value. You can use the money for future investments or emergencies. It’s one of the reasons that purchasing real estate has become a viable investment option.

These are the top three ways to use your home equity:

1. Buy a New House

Acquiring ownership of your dream home is an exhilarating experience, so much so that you might want to do it again in the near future. You can use your current home equity to take out a second mortgage for another property. 

The best thing about this home equity loan is that it has a lower interest rate than the standard lending options, like credit cards and bank loans. However, the amount you can borrow would be limited based on how much equity you’ve accrued. Plus, it’s ideal to keep a minimum of 15 to 20 percent ownership stake for your home at all times.

Similar to your first mortgage, home equity loans are amortized and have a set term. Your monthly payments are also divided between interest and principal. 

2. Perform Major Repairs

You can also borrow into your home equity if you need to conduct major renovations and remodeling on your current property. This is a viable option for big-ticket expenses, such as fixing the entire plumbing or HVAC system.

The Home Equity Line of Credit (HELOC) is a flexible type of loan that still allows you to maximize your home’s value. It works just like a credit card, where you just use it when you need it. A HELOC typically comes with a checkbook for easier monitoring and access to funds.

It’s possible that you may be able to get future amortization with HELOCs. Another advantage is that you can borrow only the amount that you need. Additionally, there are no closing costs.

There’s also an option where you’re allowed to pay only the interest for each month. However, you’ll still need to repay the entirety of the borrowed amount at the end of the term, so make sure to think carefully when you consider this alternative. 

3. Consolidate Debts

If you find that you’re struggling to remember payments from multiple sources, you can consolidate them using your home equity. This way, you just have to pay one source, which can make payments more straightforward. After all, you won’t have to keep track of several due dates. You just need to be mindful of your equity loan’s monthly payable.

Conclusion

Buying a home becomes an investment because you have multiple ways of getting a return from this asset. You can sell the property at a higher price than when you bought it, or you can also take advantage of its equity. You can use the funds to buy another house, perform major repairs, or consolidate your debts.