In many respects, the housing market is expected to improve in 2024. For one, mortgage rates will likely drop later this year as the US economy slows and the Federal Reserve cuts the benchmark interest rates.
Even with that, many buyers will still struggle to find affordable options as home prices continue to soar nationwide. They’re hitting a record high of $384,500, marking the eighth consecutive month of yearly price increases. Most major forecasts anticipate these numbers to stay the same in 2024.
Of course, no one can predict that with certainty. Still, if there’s any price decline, it will likely be moderate because of the chronically tight housing supply. But this is not all bad news. Many homeowners are sitting on significant home equity as home market values rise.
Before home prices drop, you can capitalize on your home’s accumulated value and reach various financial goals. Here, we’ll explore how to calculate home equity and some strategies to maximize it without risking your financial future.
Understanding Home Equity and How To Calculate It
Knowing how home equity works is essential, particularly if you want to borrow money against your property. You can only capitalize on attractive terms and the untapped cash in your purchased home if you know the amount of equity it holds.
When you take out a loan to buy a house, the bank owns a portion of its value since they’re the first lien holder. That means they have a legal right to your property as collateral for your mortgage. The part of your home you own outright without financing is your equity.
In other words, your home’s equity value is the difference between your home’s current market value and the remaining amount on your mortgage. Suppose an appraiser values your home at $360,000, and you owe $160,000 on your mortgage. In this example, you’ll have $200,000 in home equity.
Calculating your home’s equity is straightforward as long as you have accurate figures. You can easily enter them into a home equity calculator. Take note of the following steps to get the information you need and perform a baseline calculation of your home’s equity:
- Determine your home’s worth with online estimators or by hiring a professional appraisal.
- Know your outstanding loan balance through your most recent mortgage statement or lender’s online portal.
- Subtract the amount you owe in your mortgage from the current appraised value of your home.
It’s worth noting that most lenders won’t allow you to borrow the total amount of your home equity. They let you borrow up to 80 to 90 percent of available equity. That still depends on the lender you work with, your credit, and your income.
Moreover, lenders won’t rely on your equity amount when approving the loan. Instead, they will examine your loan-to-value ratio. Typically expressed as a percentage, its calculation divides your remaining loan balance by the home’s appraised value.
Strategies To Maximize the Equity in Your Home
The financial flexibility that equity can provide is a valuable resource you shouldn’t overlook.
Taking steps to build equity or increase its value gives you access to additional funds that you can use to accumulate more wealth. However, seeing a significant change in your equity can take years. It also depends on numerous factors, including the housing market, initial down payment, and interest rates.
A sizable down payment can be beneficial in building your home equity fast if you’re still purchasing a house. On the other hand, if you own a home, you can maximize its equity with the following strategies.
Utilize the right financial tool
Utilizing the right financial tool can help you manage your home equity wisely. One alternative is getting a home equity line of credit (HELOC).
A HELOC is a flexible credit option that operates similarly to a credit card. It lets you access funds whenever needed up to a set limit. Before sending a HELOC loan application, compare the rates and terms of multiple lenders to find the most suitable choice.
Invest in high-value home improvements
When the value of your home increases, the equity calculation changes, too. Investing in home improvement projects that enhance your property’s value can help boost your equity more effectively.
For the best outcome, stick to projects that add substantial value to your home. Here are some minor and major improvements proven to increase a home’s value:
- Minor improvements: New paint, light fixtures, kitchen cabinets, bathroom fixtures, and garden enhancements.
- Major improvements: Additional living space, complete kitchen and bathroom remodel, flooring upgrades, window or siding replacement, and an HVAC system upgrade.
Reduce your mortgage debt
As you make your regular mortgage payment, you reduce your principal balance. That means you’re increasing your ownership stake in your home, maximizing its equity over time.
Even small additional payments on your mortgage can significantly lower your loan balance and increase your home equity. If you want to access more cash from your equity, consider paying more than your minimum monthly mortgage payment.
More Tips To Make the Most of Your Home Equity
No restrictions exist on using the funds you obtain from your home’s equity. You can use it to pay for significant expenses or reach your financial goals. Although you can apply it for virtually any purpose, it doesn’t mean it’s a wise financial decision for every circumstance.
Using the equity in your home for the wrong reasons can harm your finances. Hence, carefully evaluate what’s at stake, such as substantial fees, equity depletion, default, and foreclosure risk.
Only consider borrowing from your home’s equity if it benefits your financial situation. Below are some tips to make the most of this financial asset:
Consolidate high-interest debts
A loan from home equity often has better interest rates and more extended terms than other financing options. Using it to consolidate high-interest debts can be a wise financial move.
However, you must pay the new loan on time consistently. Defaulting on it can put your home at risk of foreclosure.
Fund an emergency
Tapping into your home equity can be an excellent means to fund an emergency when interest rates are low.
Specifically, a HELOC is a wise option if you consider using home equity for financial emergencies. Since your home’s value secures it, you can qualify for lower interest rates with HELOC than personal loans or credit cards. Keep in mind that you will accrue interest when you withdraw the funds.
Support your retirement
Using home equity to boost retirement savings can strategically grow wealth and secure your financial future. It helps diversify your investments and reduce your market risk. However, like any financial choice, you must think it through. Do your research and talk to a loan officer before pursuing this action.
Make Informed Financial Decisions for Your Home
Strategically tapping into your home equity can yield considerable financial advantages. Ensure to delve into your options thoroughly, establish defined objectives, and remain mindful of the possible risks.
Remember, any time you use your equity, your home serves as collateral, putting it at risk of foreclosure. So, despite its many benefits as a financial tool, be careful not to overutilize it. Consider accessing home equity only for goals that improve your overall financial well-being as much as possible.
