Maximizing home equity is an option that more and more people are contemplating. With both home ownership and personal debt on the rise, a large amount of emphasis is being placed on home equity as a form of loan collateral.
The reason for this is that – equity let lenders to secure a high-value item as collateral while allowing you the ease of dealing with matters of paperwork instead of tangible objects when securing a loan. Unfortunately, a large number of people are unsure of exactly what equity is and are even more unsure of how to use it effectively. If you are one amongst these people, don’t worry the describe information presented below is here to describe what equity is and the most common ways that it’s used, as well as when to use it, when not to, and how to get the most out of it when you do decide to use it.
What Equity Is and How It’s Used
Equity is a measure of how much of your home or other real estate you actually own, and as such is a measure of how much your property is actually worth without the remaining mortgage lien on it. It is equal to the percentage of your mortgage that has been paid to date, and it’s value is determined by subtracting the remaining mortgage amount from the total value of your property. It is used most often as collateral to secure loans or lines of credit, the uses of which range from debt consolidation and loanrefinancing to automotive financing and home improvement. Borrowing against equity reduces the amount of equity that you have in your home (since that portion is once again under a lien), but the remaining equity still continues to grow over time.
When to Use Equity and When Not to Use It
As equity grows in value over time and takes time to build to significant levels, it’s not always appropriate to use your equity as collateral. Generally, you should only use your equity once it has risen to at least 25% or more of the value of your home (though the higher the percentage is, the better); even then it should only be used when the loan or credit line is for something important.
If there are alternative forms of collateral that can be used to secure loans or credit lines while your equity is growing, they are usually a better option… as your equity begins to grow over 50%, though, this becomes a bit less of an issue. On the other hand, equity should not be used as collateral for frivolous loans or for high-risk investments unless you have some alternate plans for loan repayment… and even then it’s best if you find some other form of collateral since there is at least a chance that you’ll have nothing of value to show for the loan afterwards.
Enjoying Your Equity
It’s important to remember that equity represents an investment that you’ve made over years, and as such should be considered an acceptable form of collateral for many loans after is has had several years to grow in value. Many individuals allow their equity to grow until the house that they’re paying on has been completely paid off, and then establish credit lines to help them prepare for retirement or to do the things that they’ve always wanted to do.
While it should not be treated frivolously, it should also not be feared… the most important thing is making sure that it is used for something significant, so that the repayment of the equity loan isn’t something that you regret.
Published in: Personal Finance