Understanding Home Equity And How It Can Work In Your Favor As A Home Owner

Home equity in real estate can be termed as ownership value built into a home which is a representation of the home’s market value minus pending mortgage payments. This value grows as time goes by as the owner of the property makes mortgage payment thereby increasing the home’s market value.

Equity can be determined by taking the home’s market value and subtracting from it any pending loan balances.

Home equity can be viewed as the share of the home that you actually own. While you are considered the overall owner of the home, the fact that you purchased the home using borrowed money which is yet to be paid off means that the lender partially owns the home until the loan is completely paid off in full.

The asset with the highest value to a homeowner is home equity. The homeowner can use it to his/her advantage in the future. It is therefore vital for him/her to have a perfect understanding of how it works and use it wisely.

Let’s review an example of home equity: Assuming you bought a home for $500,000 and placed a 20% down payment for it which amounts to $100,000, which you took from your own savings. You then acquired a loan to cater for the pending $400,000. The home equity interest that is due to you is 20% of the value of the home.

The total value of the home is $500,000. You paid $100,000 with your own money, amounting to 20% of the overall price which is $500,000. This means that you have ownership of the home, but in essence, your value of ownership for it is $100,000, or 20% equity stake.

The loan lender technically owns no part of the home since the officially recognized homeowner is you. The home, however, acts as a collateral or security for the loan you took to pay for it. The lender’s interest is secured by having a lien on the house.

In the event that the value of your home doubles and becomes $1,000,000, the amount that you owe the lender still stands at $400,000, but your equity stake increases to 60%. The way to determine this is by taking the loan balance, which in our case is $400,000 and dividing it by the new market value which is $1,000,000 and then subtracting the acquired result from one. The answer in decimal form is then converted to a percentage by multiplying it with 100.

It is important to note that the loan balance that you’re due to pay still remains the same but there is a substantial increase in your home equity which is a plus for you.

So how can you grow your home equity? Below are a few ways that you can do it:

  1. Repaying Your Loan

As you continue paying off your pending loan balance, you increase your home equity. A large number of home loans are Standard Amortizing Loans where monthly payments are projected towards your principal and interest. With the passing of time, the amount incurred for the repayment of the principal increases, thereby building your equity at an additional rate each year.

If you’re operating with an Interest-Only Loan or any other form of a non-amortizing loan, equity cannot be built up in a similar manner. You may be required to have additional payments to minimize the pending debt and grow your equity.

  1. Increasing Price

Another way to build equity is when your home increases its value, this being independent of your actions or influence. It can be sponsored by a vibrant real estate market or the rise of better projects.

So how can you make use of home equity is a question you may be asking. Equity being an asset forms a section of your overall net worth. You may decide to one day make a single withdrawal from your equity or retain it and pass it down to your successors.

Below are some of the different ways you can use your home equity:

  • Use It To Purchase Your Next Home

You may not live in the same home forever. If you plan to shift to a different home, you can opt to sell your current house and invest that money towards purchasing another one. If there are pending mortgages, you can’t use all the money you get from the sale, but you can use the equity.

  • Take Up A Home Equity Loan

You can take up a Home Equity Loan and get money to spend on any need or activity you may have at hand be it paying for school fees, home improvement, purchasing a car, whatever need that the money can meet.

  • Finance Your Retirement

You can spend your equity in the years after taking up retirement through a Reverse Mortgage. Such a loan becomes a source of income to you when you retire and need no monthly payments. Their full repayment happens when you vacate from the home.

It’s important to note, however, that these loans are complicated and may pose potential problems to you as a homeowner in the future.

One other important aspect to consider concerning home equity is home equity loans. They allow you access to huge sums of money at low-interest rates. They are backed up by real estate making them easy to qualify for.

You can access a home equity loan by applying with lenders who evaluate the house’s market value and determine the amount that you can borrow. You can get a Home Equity Loan where you receive a lump-sum of money and repay it at a fixed rate with flat monthly repayments over the years.

A HELOC (Home Equity Line Of Credit) makes the provision for you to draw funds as per your need. You have the provision to borrow the specific amount that you need within the draw period so long as you maintain an open line of credit. Minimal payments can be made on the debt.

Once your draw period ends, you’re expected to repay all your debt aggressively with no delays and clear it off fast. Applicable interest rates are variable.

They, however, have risks attached to them, one of them being that your house acts as the loan’s collateral. In the event that you fail to repay the loan, the lender has the authority to take over the home in a foreclosure and sell it to recover their money. This will most likely send you back to renting.

Home equity can work well for you as a homeowner if you have a proper understanding of it. With this insight at hand, you can use the home equity available to you in your favor and accomplish more with it. Make the best of this great asset.

 

 

Are You A Homeowner Aged 62 Years And Above? You May Want To Consider Using A Reverse Mortgage

A Reverse Mortgage in real estate can be termed as a home loan which allows you to convert part of the home equity that you’ve built up over the years while making mortgage payments into cash. This loan places your home as a collateral.

By terming it as reverse, it means that you’re the one receiving money as opposed to making monthly payments to your lender. Your loan amount also increases over time in contrast to it decreasing as you pay each monthly payment.  This concept can be likened to taking a second home equity loan or mortgage.

Reverse Mortgage is only applicable to people aged 62 years and above. There is no requirement to repay the loan and this valid until the day you vacate out of the home.

You can get money to run any kind of errand or supplement your savings and any other modes of income that you have via this loan. Sounds great, right? You should, however, note that this loan is quite complicated to unwind and it reduces your assets that you’ve set apart for your successors.

One of the major sources of Reverse Mortgage is HECM (Home Equity Conversion Mortgage). It is considered to be cheaper for borrowers since it is backed up by the government and the rules behind it make the loans offered consumer friendly.

So how do you qualify for a Reverse Mortgage?

  1. You should have a home that belongs to you, and not a rented property.
  2. You need to be 62 years of age and over.
  3. You should have enough equity in your house since you are drawing money from your home.
  4. You must have the financial capacity to consistently pay for home-related expenses such as insurance premiums and property taxes to ensure that the property value is maintained and you remain its sole owner.
  5. If you have a pending first mortgage, you can receive a Reverse Mortgage on condition that the Reverse Mortgage will become the property’s first lien. This means that borrowers can pay off the pending mortgage debt with a portion of the reverse mortgage. This works best if your home has 50% equity.

There are several factors that play a role in determining the amount of money that you can receive from loans. These include:

Equity

The higher your home equity is, the more loan amount you can get. It works best for borrowers who’ve been consistently paying their loan over the years and the mortgage is almost completely cleared off.

Payments Made Periodically

You can settle on the option of receiving consistent payments which can be on a monthly basis. These payments can be lifetime or for a limited predefined time period, for instance, 10 years. In the event that your loan is outstanding owing to the fact that all borrowers have shifted from the house, the payment seizes.

Line Of Credit

You can decide to use a line of credit as opposed to taking cash instantly. This gives you the provision to get money when you need it. The beauty of this method is that you get to pay interest only on money that you’ve actually borrowed. Your credit line also has the potential to grow with time.

Interest Rates

The lower the interest rate is the more amount of money in form of a loan you can receive from the Reverse Mortgage.

Lump Sum

You can receive all the money in one payment. The interest rate on the loan is fixed. Loan balance increases over time with the continuous increase in interest.

Age

The youngest borrower’s age greatly affects the amount of money you receive. Older borrowers can get more. Excluding the younger borrower in order to receive a higher payout could be risky since the younger borrower will have to vacate the home in the event of the death of the older borrower due to him/her being excluded from the loan.

Using A Combination

You can make use of a combination of all the factors listed above. You may, for instance, initially take a small lump sum and then maintain a line of credit for use later.

Reverse Mortgage Costs: What Do They Entail?

Getting a Reverse Mortgage involves the payment of fees and interest. The fees are incorporated or financed into your loan. They minimize the equity amount in your home which means you’re left with less in your estate. It is advisable to pay out the fees using money from your pocket as opposed to paying interest associated with the fees over many years.

You’re also obligated to pay closing costs similar to those of a home refinance or purchase. You’ll need to do an appraisal, file documents, and have your lender review your credit. You can manage some of these costs but others are beyond your control.

Servicing fees from a Reverse Mortgage can give you sticker shock because of how high they are. There are, however, maximum limits in Home Equity Conversion Mortgage fees.

You are also subject to paying insurance premiums to the Federal Housing Administration since Home Equity Conversion Mortgages have the backing of the Federal Housing Administration which minimizes your lender’s risk. The initial mortgage insurance premium ranges between 0.5-2.5% and an annual 1.25% fee for your loan balance.

With regards to repayment, Reverse Mortgage doesn’t involve monthly payment, rather, the loan balance is payable the moment the borrower makes a permanent shift from the home either upon selling the home or in the event of death.

The debt payable will sum up to the cash amount received plus the accumulated interest on the borrowed money. This debt keeps growing over time since you’re borrowing but not making payments. The debt becomes due upon the borrower’s exit from the house, and it needs to be repaid.

In the event that you fail to oblige to the agreed terms such as paying property taxes, your loan may become due and you will be required to pay.

Reverse Mortgages are repaid via selling a home. If the house sells more than what you owe, the extra amount is handed over to you. If it sells for less than what you owe, you’re not obliged to pay for the pending money with a Home Equity Conversion Mortgage. In other words, you are free from the debt.

However, if your successors make the decision to retain the home, the full loan amount involved is due regardless of whether the loan balance is more than the value of the home.

If you’re a homeowner aged 62 years and above, getting a Reverse Mortgage can be quite advantageous to you in the long run. With no income needed on your part, accessing it is easy even when you’re on retirement. Why not try it today?