Do you own your home or an investment property? If you do, there’s a good chance you’ve built up some equity. Home equity is the difference between your property’s market value and the balance left on your home loan. Put simply, it’s how much you truly own of your home. For example, if your home’s market value is $500,000 and there is $200,000 outstanding on your mortgage, your home equity is $300,000.
When there’s equity available in your home, you can use it to achieve future financial goals. But how does it work and how do you find out exactly the amount of equity you have? We go through the five key steps involved in accessing your home equity and how to use it as a line of credit.
How Exactly Does Home Equity Work?
Home equity can be a long-term strategy for building wealth. It takes time to build, so those who keep their homes longer are more likely to accrue a higher amount of equity. Building home equity involves investing in a long-term financial goal. For the most part, your money is locked in in the loan and unable to be touched. Once you’ve built up a certain amount you have the opportunity to use it for future investments.
To build up equity in your home, you can:
- Increase its value by renovating. If you have some money to spend, renovating your home to include a new room, update an existing kitchen or expand the garage will, in turn, increase its value. The higher your home is worth, the higher your equity.
- Reduce your home loan balance by making more regular, or larger, repayments. Home loan repayments reduce what you owe on the mortgage while your home continues to gain value. Basically, paying down your mortgage is liked a forced savings account – the more money you repay, the more equity you gain.
- Open an offset account. An offset account is a savings account which is linked to your home loan. The account’s balance is offset against your mortgage balance, which means you’re only charged interest on the difference between the total loan balance and the amount you have in the offset account. This saves you interest and reduces your home loan amount quicker. You can also access any money you have in the offset account at any time.
Using Home Equity as a Line of Credit
A line of credit, or home equity loan, allows you to borrow money using the equity you have in your property. Generally, most lenders will lend you up to 80% of your property’s value. Because home loan rates are usually far lower than those commonly associated with personal loans and car loans, using the equity in your home can be an effective way to finance a future purchase. You can use home equity as a line of credit to:
- Improve your lifestyle, such as purchase a new car or go on a holiday,
- Renovate your property or home maintenance,
- Invest in shares or managed funds, and
- Buy an investment property.
Although using your home equity as a line of credit can increase your financial position in the long-term, make sure you do your research first as the fees involved can be high. You also need to be careful of over-commitment; it’s easy to take out a line of credit and spend it on other necessities which can lead to being unable to afford the new loan repayments. If you use the equity in your home to fund other purchases, it’s also likely to take much longer to finally own your home.
5 Simple Steps on How to Access the Equity in Your Home
1. Find out exactly how much equity you have
The first step is to have a valuation completed on your property. This involves an independent valuer examining your home to look at its condition, age, size, and location. You then find the difference between the value and your home loan – that’s your available equity.
2. Know what you want to use the equity for
The equity in your home is the result of time and hard work. If you don’t have a plan in mind, you may end up using the cash on something invaluable – and end up in a worse place financially. Make sure you think carefully about your options before you redraw your home’s equity.
3. Review your mortgage refinance options
At this point of the process, you should consider researching and evaluating your home loan options. Refinancing your home loan to access equity can allow you to tap into the funds you need and gives you a chance to secure a better deal than your current home loan.
4. Find out the costs involved
If you choose to refinance, depending on the amount of equity you are looking to access it may result in various fees and costs. If you choose to access over 80 per cent of your property’s value, you will likely need to pay Lender’s Mortgage Insurance (LMI). If you decide to switch to a different lender, there may also be costs involved with breaking from your current lender, new application fees and government fees. Just because you may have equity available, doesn’t mean you have to use it.
5. Apply for a line of credit
Once you’ve decided on the right loan option for you, the final step is to apply. Get in touch with us at Positive Solutions Finance and we’ll work with you to get the application process started and support you every step of the way.
We Can Help Refinance Your Mortgage to Access Home Equity
If you’re unsure accessing the equity in your home is the best idea for you, get in touch with our lending experts today. They’ll assess your financial situation, determine how much equity you have access to and find the best refinance option suited to your needs. Contact our team on 1800 560 592 for a free consultation.