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Understanding Your Home Equity

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October 2018
Homeowner & Buyer Tips
Homeowners are always talking about equity, but if you’re new to home ownership, the concept might still be pretty foreign to you. Home equity is something you earn as you own the house, and that amount translates to a monetary value that you have the ability to tap into. From a total home remodel to the extravagant wedding of your dreams, let your home help you finance the life you really want.
 
The value of home equity is higher now than it has ever been. Once you understand the true value of your home equity, you’ll be able to see just how much it can do for you.
 

What exactly is home equity?

Home equity represents the value of your property that you own outright. While your home is yours to do with as you please, your mortgage lender still has a stake on the property until your loan is paid off. Each time you make a mortgage payment, you’re claiming a small portion of equity. As hefty as mortgage loans can be, this small victory should motivate you to make payments on time. The more equity you have when the time comes to sell the house, the bigger payoff you’ll receive from the purchase. 
 
Even though you took out a loan to pay for your house initially, your equity does not begin at zero. Remember all that money you saved up to put towards your home’s down payment? That’s the start of your home equity. The more you saved up, the more equity you start with.
 
There’s more than one way for home equity to grow. Ultimately, it can increase over time through three main avenues:

  • As more mortgage payments are made
  • As the housing market changes
  • As you increase the value of the home

Determining an estimate of your equity is simple. Take the full purchase price that you agreed on when you bought the house and subtract the amount you still owe on your mortgage. This number gives you a general idea of how much you’ve already earned.
 

How does the real estate market affect my equity?

You arrived at the starting point of your equity by subtracting the amount you owe from your purchase price, but that’s only the tip of the iceberg. The purchase price may or may not be an accurate representation of your home’s current market value. The market value is how much your home is actually worth.
 
As your home ages, market value can sometimes go down just because the property is older and more lived-in. The value may also fluctuate as trends in the real estate market affect the demand. When there’s higher demand, your home has more value. This is why sometimes we refer to the market as a “seller’s market,” because the current demand favors the seller, increasing the value of their home simply because more people are looking to buy houses. 
 
You can see now that as the value of your home goes up and down, your equity does the same as a result. You may have paid $300,000 initially, but if the market estimates your home’s current value at $350,000, then that’s $50,000 in equity you’ve earned, before you even consider your down payment and any mortgage payments you’ve made since.
 

Can I grow my equity faster?

While home equity should go up each time you make a mortgage payment, you have options to grow it in other ways. Because the formula involved subtracting your payments from the home’s value, you can add equity by simply increasing the value.
 
What this means is that anytime you add improvements to your home, like replacing the roof or remodeling a bathroom, you’re adding equity by increasing the home’s value. The blood, sweat, and tears you put into your house can really pay off in the end if you make the right choices.
 

What can I do with my home equity?

When you sell your home, the equity you’ve earned goes right into your pocket. However, you don’t have to wait until it’s time to leave the home to enjoy the value of your equity. By tapping into it early, you’re able to do so many things that ultimately enrich your quality of life:

  • Consolidate your debt
  • Take a well-earned vacation
  • Buy a second property, like a vacation home
  • Give yourself or your child the wedding of their dreams
  • Pay for your child’s college tuition

These options allow you to withdraw money from the equity you’ve earned. You’ll pay back the amount you withdraw as you continue to make mortgage payments and eventually sell your home. 
 

Can I put my equity back into my house?

A popular way of using equity is to make improvements to your home. Not only do these improvements help to raise the overall market value, but they allow you to make the house your own. Think back to when you bought the property and remember all the little things that had you hesitating. Maybe the kitchen’s finishes didn’t really match your style, or perhaps you really wanted a second bathroom. These improvements can turn the right home into your dream home.
 
According to a recent Harvard study, the rate at which homeowners are remodeling is steadily rising, with an expected increase of approximately 7.7% between last year and this year. Don’t let the stress of home improvement beat you down. There are lots of ways, aesthetically and functionally, to add value:

  • Update your kitchen or bathroom
  • Finish that unfinished basement
  • Improve curb appeal with a full landscape makeover
  • Make your backyard the oasis you always envisioned
  • Transform your bedroom into a master suite
  • Replace old carpeting with new floors
  • Add new siding or a new roof to freshen up the exterior

There’s no limit to the improvements you can make by using your home equity to add value to both your home and your lifestyle. Make it the home you always wanted it to be.
 

What financing options do I have?

At DVCU, we’re here to help you utilize the maximum value of your Arizona home equity. We offer two options that allow you to tap into that value at any time.

Home Equity Line of Credit (HELOC)

A line of credit allows you to withdraw money a little at a time, as you need it. You’ll pay back a little bit of what you borrow each month for a predetermined number of years. This option gives you the freedom to take care of those unexpected hiccups in life when they occur. Borrow as little or as much as you need at any one time.
 
Take advantage of our HELOC option. It includes many competitive perks:

  • Up to 80% of the appraised value of your home
  • Payment is 1.5% of outstanding balance
  • Ten-year draw period plus a ten-year repayment period
  • Competitive adjustable rates

Second Mortgage Loan

With a second mortgage, you’re using your home as an asset to apply for a new loan. This is a great option for those bigger expenses in life that you know are coming: a wedding, college tuition payments or home improvements. DVCU takes care of you by offering you several second mortgage loan benefits:

  • Up to 80% of the appraised value of your home
  • Repayment term options from 60 to 180 months
  • Competitive fixed rates
 

How do I get started?

Let us know if you’re ready to see how your home equity can help you achieve your goals and enrich your lifestyle! Do you have more questions? DVCU is committed to answering your questions and walking you through the process so you know what to expect. Please contact us or stop by a branch and we will assist you. 

This article is intended to be a general resource only and is not intended to be nor does it constitute legal advice. Any recommendations are based on opinion only.

Rates, terms and conditions are subject to change and may vary based on creditworthiness, qualifications, and collateral conditions. All loans subject to approval.