7 Things You Need to Know About Home Equity

Building equity is important to every Canadian homeowner. Besides having the pride of owning your own home, owning real estate means you can begin to build some wealth and security for the future.

Following are some things every homeowner needs to know about equity and building it.

What equity is. Equity is what your home is worth minus what you still owe on the mortgage. So, it’s what you’ve already paid off on your home. The equity is the portion of your home that you actually already own. What you haven’t paid is secured by your lender. If a homeowner defaults on the mortgage, the home can be repossessed by the lender.

How to build equity. There are two ways in which you can build equity in your property: By paying off the principal part of the mortgage and by increasing the property’s market value over time. When you make payments on your home, a portion goes to pay down the principal and a portion pays down the interest, so every payment cycle, your equity increases.

Market value. Even with the ups and downs in the real estate market cycle, the value of your home will increase over time. This means your equity in it will also increase, even without mortgage payments taken into consideration. The way in which to further increase your home’s market value is to make improvements to it. You might wish to consider remodeling or modernizing the kitchen and bathrooms, replacing carpets with natural materials like hardwood.

The importance of equity. If you’re looking to build long-term wealth, building equity in your home is extremely important. Owning a home on which you’re making mortgage payments is akin to having a savings account of sorts. With every payment you make, you increase what your home is worth to you. You know that whenever you make a mortgage payment, you’re benefiting from increased equity and you’re one step closer to owning your home outright.

How equity can benefit you. You can use the equity built up in your home for various things including obtaining other loans. There are many benefits to a home equity loan. You might wish to use that money to make renovations to your home or for another specific project that will further increase your equity.

Purchase another home. If you decide to upgrade, you can use the equity you’ve built up in your current home to buy another. You can use that equity even if you still have a mortgage.

Reverse mortgage. If you’re 55 years old or over and you’ve built up enough equity, a reverse mortgage might be an option for you. The equity secures a reverse mortgage which is repaid if you decide to move or sell or upon death of the owner(s).