If you have been paying off a home loan for some years, chances are you have achieved a level of equity that can be useful in these tough economic times. Even if your home loan is not yet fully paid off, the equity you have built over time can be helpful in several ways: You can use it to consolidate your debts, pay tuition fees for your dependents, fund major home renovations or even buy a second property as an investment.
What is equity?
Equity is the difference between what your property is worth and what you still owe on it. In other words, if you were to sell the home and pay off your loan, equity would be the cash amount left over. Remember that property is one of the few assets with the potential to appreciate in value over time. As the value of your home increases, so does your equity – provided you keep up to date with your home loan repayments.
The formula for working out your home’s equity is straightforward. If, for example, your home is worth $2 million and you still owe $500,000 on your loan, you are in ‘a positive equity position’ of $1.5 million.
If you make renovations that enhance your property’s value, you can also increase your equity
Why is building equity a good thing?
Equity grows over time and can be used in various ways that benefit you. You can borrow against equity for almost any emergency. If you have a Green home loan, for example, you can borrow against equity using GreenRevolve, Readvance or a further loan.
You could use a loan against equity to consolidate your debts, so that you only have a single instalment to pay over a longer period. Or it may be wise to leverage your equity to start building wealth – if you take out a loan against equity to buy a second property, you can rent it out for extra income. This can be a handy asset to own during your retirement years.