What I Wish I Knew About Home Equity

There’s a lot to learn when embarking on your homeownership journey. From managing new home expenses to understanding the intricacies of your mortgage, the homeownership info dump can feel daunting.
In fact, one of the most misunderstood aspects of owning a home is the concept of home equity. What is it and how does it work? How can you increase it and what are the advantages? In this Clearview blog article, we’ll take a look at the answers to all of these questions and more.  

What is home equity?

Investopedia defines it as “the difference between the amount you owe on a mortgage and what the home is worth. It's essentially what you own in a home.” The bigger the difference between those dollar figures, the more you can borrow with a home equity loan or line of credit, both of which are financing options that people use in different ways like for home improvement projects or other major life expenses.

How does home equity work?

There are two ways to look at how it works:

1. When you get a mortgage, your lender owns more of the loan than you do. As mentioned before, the more you start paying down the principal of your loan, the more you actually own and the more equity you gain.
2. You can also gain equity if your home appreciates or if the current value of it rises. However, if the value depreciates or goes down, you will lose equity.

How do I use home equity?

One homeownership strategy people use often is to borrow against the equity of their home. Reasons for doing this can vary depending on what you’re looking for. Many will borrow to consolidate other debts, pay for a large upcoming expense, and more. There are unique pros and cons to opening one of these finance options based on your intention for the money, so be sure to educate yourself in order to make the most informed decision possible.

How do I increase my home equity?

Here are a few ways that may help you increase the equity in your home:

• Try to make the largest down payment you can when buying a home. The larger the down payment, the more equity you’ll have from the start. 
• If you can, try paying a little extra on your principal every month. Not only will this help you pay down your mortgage quicker, it will also give you more equity.
• Try your hand at some home improvements! Completing some renovation projects can increase the value of your home, thus increasing your equity.
• Keep your home for as long as possible. The longer you stay put, the more (in theory) you should see your home appreciate.

Home equity is certainly a powerful financial tool to those on their homeownership journey. However, it can be easily misunderstood. We hope that this article has opened the door to understanding what equity is and how it works.