As a homeowner, it’s important to understand how to make the most of your property’s value. The best way to start is by wrapping your head around what home equity is and how it’s measured.
Home equity is measured by calculating the difference between your home’s appraised value and what you still owe on your mortgage loan, including any liens against the property or second mortgages. For example, say you still owe $150,000 on your mortgage. Your home’s current appraised value is $250,000. This means your home equity totals $100,000.
Lenders use this number to calculate a loan-to-value (LTV) ratio. The LTV determines whether you qualify for home equity lending products, such as a loan or line of credit, and usually correlates with the interest rate you will receive if approved. The lower the LTV percentage, the better the rate, in most cases.
How does home equity benefit me?
Equity provides a valuable financial asset you can use as collateral to secure a low rate when taking out a home equity loan or home equity credit line. You gain the power to borrow against your home’s value to pay for things you may need now, like a car repair or updated bathroom.
Building home equity can help you secure funding to cover significant expenses, such as a home renovation or substantial medical bills. Many homeowners choose to invest the money back into their home to increase its value.
How can I increase my home equity?
While a number of factors determine your home’s value, you can increase your home equity several different ways.
Strategies to increase home equity include:
- Paying down your mortgage principal by making regular payments.
- Making additional payments (or pay a lump sum) on your mortgage principal.
- Focusing on home improvements to increase your property’s value.
Over time, many homes will increase in value based on factors including your local real estate market and the national economy. While you can figure an approximate estimate of your home’s current value based on similar properties for sale in your area, only a real estate appraiser can determine your home’s current value.
When applying for a home equity loan or HELOC, the lending bank will typically send an appraiser to evaluate your property’s current value in person before approving the funds.
Ready to put your home equity to work? Learn more about home equity loans and HELOCs with First Merchants and get started on an online application.
