Equity, the often-underutilized asset hiding in plain sight within your home, can be a powerful tool in your real estate journey. Whether you’re looking to upgrade to a larger space, downsize for retirement, or invest in additional properties, understanding how to leverage equity effectively can open doors to new opportunities.
What is Equity?
Equity is the difference between the market value of your home and the amount you owe on your mortgage. Put simply, it’s the portion of your property that you truly own outright. Over the years, you gain equity as you pay down your home loan and as home values rise. It can grow faster than you realize.
Americans are sitting on tremendous equity. Over 2/3 of homeowners have either completely paid off their mortgage or have at least 50% equity. The average homeowner with a mortgage has $298,000 in equity.
Using Equity to Purchase Your Next Home
- Home Equity Loan or Line of Credit (HELOC): A home equity loan or HELOC allows you to borrow against the equity you’ve built in your current home. With a home equity loan, you receive a lump sum of money upfront, while a HELOC functions more like a credit card, allowing you to borrow against your equity as needed. These funds can then be used as a down payment on your next home or for other purposes related to your real estate goals.
- Trade-Up Strategy: If you’re looking to upgrade to a larger or more expensive home, you can use the equity from your current home as a down payment on the new property. By leveraging your existing equity, you may be able to secure more favorable financing terms and reduce the amount of additional cash needed for the purchase.
- Downsizing: Downsizing to a smaller or less expensive home in retirement is a common strategy to free up equity for other purposes, such as supplementing retirement income or funding travel plans. Selling your current home, cashing out your equity, and purchasing a more affordable property can provide financial flexibility and peace of mind in retirement.
- Real Estate Investment: Another option is to use the equity in your primary residence to invest in additional properties. Whether you’re interested in rental properties, fix-and-flip projects, or vacation rentals, leveraging your home equity can provide the capital needed to expand your real estate portfolio and generate passive income.
Benefits of Using Equity
- Access to funds – leveraging equity allows you to access funds without having to sell your home, providing liquidity for various financial needs or investment opportunities.
- Make a larger down payment – this way you’re borrowing less at today’s mortgage rate.
- Be an all-cash buyer – If you’ve lived in your home a long time, you may be able to avoid having a mortgage by buying your next house in cash.
- Lower interest rates – home equity loans and HELOCs typically offer lower interest rates compared to other types of loans, making them a cost-effective borrowing option.
- Tax deductibility – in some cases, the interest paid on home equity loans or HELOCs may be tax-deductible, providing potential tax benefits for homeowners.
- Flexible repayment options – home equity loans and HELOCs offer flexible repayment terms, allowing you to tailor the loan structure to your financial situation and goals.
Considerations Before Using Equity
- Risk Management: Borrowing against your home equity involves risk, so it’s essential to carefully consider your financial situation and ability to repay the loan.
- Impact on Equity: Using equity for other purposes may reduce the equity you have available in your home, which could impact your financial security and future borrowing capacity.
- Market Conditions: Keep an eye on real estate market trends and interest rates when considering leveraging equity, as these factors can impact the overall cost and feasibility of using this strategy.
Leveraging equity can be a valuable strategy for purchasing your next home or achieving other real estate goals. I’m happy to help you decide if this is the best option for you. Please do not hesitate to reach out if you have any questions or if there’s anything specific you would like to discuss regarding your real estate portfolio.
Jeff Lesley, Century 21 Vanguard
JLesley(at)WilmingtonC21(dotted)com
Cell: 910.297.7071