BUYING A HOME

How Does Equity Work?

When you’re researching home ownership, you hear the word equity thrown about a lot. Building equity. Home equity lines of credit. Sweat equity. But what does equity actually mean and how do you build it? Most importantly, how does equity work for you?

What is Equity?

In terms of home ownership, equity is basically the difference between the value of your home and what you owe on any existing mortgages or other loans or liens on the property. You can often access some – but not all – of the equity through a home loan refinance or a Home Equity Line of Credit (HELOC). You net the full value of the equity when you sell the home.

How do you tell what your home is worth?

It might be the original purchase price, but it is likely that the market value has fluctuated since the original purchase. Perhaps the house has appreciated in value, or you might have put in some work to earn sweat equity. Here are a few options for figuring out what your home is worth:

• Use websites such as Zillow or Redfin to get an estimate of your home’s value
• Use online calculators like this one
• Have a professional appraisal done
• Contact one of our loan officers

Why should you build equity?

For many, homeownership (and the related home equity) is a realistic path to financial security. Equity can be a good source of funds to pay for retirement, as well as building wealth to pass on to children, and is a common reason why renters decide to buy. Additionally, homeownership is often a less-risky investment than the stock market.

Home equity takes time to build. The more time you have, the more options you have to take advantage of your home as a resource. You can use your home’s equity to pay off other debt from higher rate loans or credit cards. You can also use it to finance home improvement projects that might increase your home’s overall value if and when you decide to sell.

How do you build equity?

There are basically two paths for building equity:

• Paying down the principal balance of your mortgage.
• Appreciation, or an increase in the home’s market value.

If you have the resources available, paying down your principal balance can be a good option. Remember, your equity measures the difference between the value of your home and what you owe on it. So the more of the principal balance you pay back, the more equity you’ll create.

However, remember that your principal and interest payment differs from your total monthly mortgage payment. 

If you have more time on your hands than available resources, building equity through appreciation might be a better option. Unlike with new or used cars, whose value depreciates over time, homes tend to retain or gain value, following market trends. This isn’t always the case; when the tech bubble burst in the early 2000s, many people lost a majority or all of their equity. However, home ownership usually increases equity over time due to appreciation.

You might also increase your home’s market value by putting in ‘sweat equity’ – improvements you make on your home now might increase its value down the road. A personal loan or Home Equity Line of Credit from SF Fire Credit Union are convenient options for financing home improvement projects – and for most HELOCs, we do not require an appraisal of the home.

How does equity work for you?

You certainly profit from your accumulated home equity when you sell, but you can also tap into a portion of it while still owning the home. A common way to access your equity is to open a Home Equity Line of Credit (HELOC). A HELOC is secured by your home, meaning you’ll typically pay much lower interest than you would for a credit card or other type of loan. As a line of credit, you won’t have any payments to make until you actually use the funds.

You can draw against the line of credit for any reason, including:

• Paying off credit card debt or other high interest loans
• Financing home improvement
• Paying for college

Another possible option is a cash-out refinance – refinancing your existing mortgage to obtain a lump dispersal of cash based on your current equity. Again, please note that the only way to access the full amount of your equity is when selling the home; a HELOC or refinance can access some but not all of the equity in the home.

Before drawing too heavily on your equity, it’s important to have a solid budget in place. Whether you open a HELOC or refinance your mortgage, the debt is tied to your home, so you might run into trouble if you borrow more than you can afford to repay.

Check Home Equity Line-of-Credit Rates at SF Fire Credit Union

We’re here to help

Building and using the equity in your home is a common method of pursuing financial security. Given the tendency of homes to retain or increase in value, equity gives you flexibility for a variety of financial goals. However, it’s important to spend only what you can afford to repay. Our Real Estate Officers have the local expertise about housing markets and home values to help answer questions you might have about whether accessing your home’s equity is a good option for your current needs.