What is home equity?
Home equity is the portion of your home's value that you own outright, free and clear of any loans. It grows as you pay off your home loan and home values appreciate.
So, if you have been in your home a few years, chances are good that the home equity has grown too. That growth could mean an opportunity to refinance your loan.
Let’s explore this further.
- Loan refinancing typically involves taking out a new loan with better terms than your existing loan and using it to pay off the balance of the old loan.
- The new loan may have a lower interest rate, which could save you money every month on your mortgage payment.
- Or, it may have a shorter term, which could save you money over the life of the loan by pay it off more quickly.
How to calculate equity
When it comes to personal finance, one of the most important concepts to understand is equity.
- Equity is the portion of a property's value that is owned by the homeowner, and it can have a significant impact on a family's financial stability.
- Calculating equity is relatively simple: it is simply the difference between the property's current market value and the outstanding balance on the mortgage.
- For example, if a home is worth $200,000 and the mortgage balance is $150,000, the equity would be $50,000.
- Families with high levels of equity are typically better positioned to weather financial challenges, such as job loss or medical bills.
- Furthermore, equity can be used as collateral for loans, making it an important asset for many homeowners.
What is LVR?
- Loan to Value Ratio (LVR) is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased.
- The asset is usually a property, and the loan is usually a mortgage.
- Lenders use LVR to assess the risk involved in lending money, as it represents the amount of equity that the borrower has in the property.
- A high LVR means that the borrower has less equity and therefore more risk, while a low LVR indicates that the borrower has more equity and less risk.
- In order to calculate Loan to Value Ratio, simply divide the loan amount by the value of the property.
- For example, if you are looking at purchasing a property worth $500,000 and you have a deposit of $100,000, your Loan to Value Ratio would be 80%. This means that you would have 20% equity in the property.
Factors that influence equity
There are a number of factors that can influence the equity in your home.
- The most important factor is the value of your property.
- If your home is worth more than you owe on it, then you have equity.
- However, if you owe more than your home is worth, then you have negative equity.
- Another important factor is the amount of money you have paid into your mortgage.
- The more money you have paid, the more equity you will have.
- Additionally, the length of time you have been paying into your mortgage can also influence equity.
- If you have only been making payments for a short period of time, then you will have less equity than someone who has been making payments for a longer period of time.
- Finally, the interest rate on your mortgage will also impact equity.
- A higher interest rate will mean that more of your payments will go towards interest, rather than principal, and as a result, you will build equity more slowly.
Ways to increase equity in your home
If you're looking to increase the equity in your home, there are a few things you can do.
- One is to make sure that your home is well-maintained and updated. This means keeping up with necessary repairs, painting the interior and exterior of your home on a regular basis, and making any other cosmetic upgrades that may be needed.
- Another way to increase equity is to pay down your mortgage as much as possible. This will reduce the amount of interest you're paying and increase the portion of your home that you own outright.
Finally, you can try to increase the market value of your home by making strategic improvements that will appeal to buyers.
- These could include adding another bedroom or bathroom, or updating the kitchen or flooring. By taking these steps, you can help to increase the equity
in your home.
If you are thinking about refinancing your home loan, be sure to consider the costs of refinancing, such as application fees and closing costs, before making a decision. Horizon Bank is here to help you with your banking needs. Visit us at a local branch or online to learn more about our refinancing options.