Whether you’re already making payments on a mortgage or are just beginning the homebuying process, understanding how to use home equity is key to getting the most out of your investment. That’s because from a wealth-building standpoint, building equity is one of the primary benefits of owning a home.
As you pay down the mortgage on a property, you gradually acquire a larger percentage of ownership from your lender. That growing share is also called equity. To calculate your home equity, simply subtract what you owe on a mortgage from the current market value of your home. Your gains on that equity come from paying down the principal on your loan plus any increase in the home’s value.
The average American household carries $8,863 in liquid savings, and the average savings of couples aged 34 or younger is roughly $4,700. Wealth-building in a regular savings account can be difficult over time, though, so building equity on a home presents a better option for storing money away. In this sense, building equity on a home is not unlike investing in bonds or other long-term financial instruments.
How to Build Equity on a Home
One popular way to build equity on a home is by making renovations and improvements.. Your equity will be calculated from the newer market value.
When you’re ready to start those upgrades and projects, however, you’ll need to find a way to fund them. Credit cards rack up significant debt because of high interest rates, so a home equity line of credit (HELOC) is a smarter way to get started. As you pay down your mortgage, a HELOC functions similarly to a credit card in that you have a set amount of credit against your equity.
You don’t have to use it all at once, either. If you have a $40,000 HELOC, you can take out part of that money to get started on a project. As you pay that particular balance down, you’re still paying off the mortgage and building equity on your home all the while.
Usually, people will use a HELOC for home improvement to build further equity, but you can also use it to consolidate debt. Buying things outside the home (such as outdoor property) isn’t out of the question, either. We’re happy to give you recommendations on how to use your funds, but when all is said and done, only you can decide how to use your home equity line of credit.
Finding a Bank That Will Listen
Clearly, access to a HELOC is one of the advantages of owning a home — but it isn’t the only way to use home equity to ensure your long-term financial health.
When applying for a HELOC, then, it’s critical to find a local bank that will take the time to chat with you and learn more about your financial situation and goals. Let’s say you’re a recent homeowner applying for your first line of credit. You’ve found that you didn’t have enough equity to begin some important home improvements, and you’re worried about how your credit score might impact your HELOC application.
At American Bank of Missouri, we’re always willing to see how we could help. Later in our partnership, we could work toward lowering your HELOC rate and mortgage payments when your credit score improves. In turn, you would be able to invest the money you save back into your home.
If you’re already an American Bank of Missouri client and are interested in pursuing a HELOC, you’re one step ahead. We know you well and understand your financial circumstances, so we’ll be able to provide tailored service and advice right off the bat.
Many banks place less emphasis on good old-fashioned personal contact in today’s digital age, but it’s more important than ever to find an expert who will give you the individual treatment you deserve. Having strong personal relationships with financial experts means you’re more likely to see great results.
When you’re ready to learn more about building equity on a home and the potential a HELOC could provide, come talk with us. We’ll help you get the most out of your investment and take full advantage of homeownership. To get started, simply contact any of our consumer lending experts.