Ultimate Guide to
Your Home Equity
+ What you can use it for
Directory on the Different Types of Home Loans
Ultimate Guide to Your Home Equity
+ What you can use it for
So you’ve finally built up some equity in your home. Congratulations! That’s something to be proud of. Now you’re wondering “how do I access equity in my home?”
Think of your home equity as a financial safety net. A cushion that you can fall back on in case of an emergency, or to help finance a big purchase. Here’s everything you need to know about your home equity, what you can use it for, and how to get the most out of it.
What is Home Equity?
Home equity is the difference between the market value of your property and the amount you still owe on your mortgage. It’s essentially the equity or ownership that you have in your home and it can be used as a financial asset for borrowing money or investing.
How to calculate equity in a home
Here’s how to calculate home equity: subtract the amount of your mortgage from the current market value of your home. For example, if you bought a house for $500,000 and have remaining $200,000 in existing loans, then your home equity is $300,000.
However, not all of your equity on home can be used. There is what we call usable equity, which refers to the equity in your home that you can actually access and use to increase your borrowing capacity.
How to work out your usable equity: calculate 80% of your property’s current value minus what you owe on the mortgage. The reason for this is that the lender will only allow borrowers to borrow up to 80% of the current value of the property without having to pay the LMI premium.
For example, if your home is valued at $500,000 and you owe $200,000 on your mortgage, your usable equity will be calculated as:
$500,000 x 0.8 = $400,000
$400,000 – $200,000 (existing loan) = $200,000.
Your usable equity is
$200,000.
How to use the equity in your home: step by step
Step 1: Calculate Your Equity
First thing you need to do is to figure out what your property’s current value is. To do this, you may get a property valuation from a real estate agent or your chosen lender. They are usually free and will take into account other properties in the area, data on recent sales, and the features of your property. Alternatively, you can also ask a Sunshine Coast mortgage broker to help you get a good estimate of your home equity. Then to work out the actual figure, you can use an online home equity calculator or use the calculation we outlined above.
Step 2: Choose the best option for using your equity
Once you know how much equity is available, it’s important to find the right loan product for your needs. There are a few different options available depending on what you are looking for, such as a line of credit, reverse mortgage, or a standard equity home loan. Each of these products has its own advantages and disadvantages that should be taken into consideration before making any decisions. We recommend talking to a home loan broker Sunshine Coast to know how to use equity in your home in such a way that you can maximise its benefits.
Step 3: Understand the terms and conditions of your loan
First thing you need to do is to figure out what your property’s current value is. To do this, you may get a property valuation from a real estate agent or your chosen lender. They are usually free and will take into account other properties in the area, data on recent sales, and the features of your property. Alternatively, you can also ask a Sunshine Coast mortgage broker to help you get a good estimate of your home equity. Then to work out the actual figure, you can use an online home equity calculator or use the calculation we outlined above.
Step 4: Compare different lenders
Shop around for lenders offering competitive interest rates and repayment plans that fit into your budget. Research customer reviews to get an idea of what people experience when they work with each lender.
Step 5: Prepare necessary paperwork
Be prepared to submit copies of income tax returns, bank statements, payslips, proof of identity documents etc., as well as any other relevant information requested by the lender.
Note:
Mortgage specialists and experts on Sunshine Coast loans can help you throughout this process so you can proceed with your home loan application with the least time and stress possible.
What you can use home equity for
Buying second home using equity to buy second home
Home renovations or improvements
Buying a car
Going on a holiday trip
Deposit on an investment property
Other investments like shares, secure bonds, managed funds, or other asset class
Wedding
Debt consolidation
Savings - your home value goes up over time!
Refinancing your home loan
Financing your child’s education
How The Home Equity Loan Works
What is a home equity loan? It is a type of loan that lets you borrow money against your home equity. Like a standard home loan, lenders will lend you 80% of the property value you want to purchase.
Here’s the real kicker: you can access your usable home equity for your deposit (typically 20% of the property value so you don’t need to pay the Lenders Mortgage Insurance premium) — so you will not have to present a cash deposit upfront. Remember that usable equity is only 80% of your actual home equity.
Home equity loans are popular in Australia because they offer borrowers a way to borrow money at a lower interest rate.
Frequently Asked Equity in home
The first thing to do is to know what your property is worth currently. For this you will need to get a property valuation. Then, you can calculate your usable equity by taking 80% of the property value, then subtracting from it what you still owe on your mortgage.
You can use the equity in your home or investment property as a deposit on a second property, while your current property becomes a security on the new debt. Using equity allows you to buy a second property with no cash deposit.
Yes, as with any form of borrowing there are some risks involved when taking out a loan against the equity in your home. If you are unable to make consistent payments on the loan then this could risk putting yourself into further financial difficulty or even foreclosure if it becomes too difficult for you to manage financially. It is important that before committing to a loan against your property that you fully understand all terms and conditions associated with it so that you know exactly what is expected from yourself before signing anything legally binding.
This will depend on which lender you choose and how quickly they can process an application for a loan against your property’s existing equity. Generally speaking though the process isn’t particularly lengthy – depending on circumstances most lenders should be able to provide an answer within 4-6 weeks from start to finish including legal paperwork etc..
This depends on how much existing debt remains on your property and also how much additional money is being added via a refinance or consolidation option through another lender. Most banks prefer that only up to 80% of total development costs are covered by their own funds; meaning that if more than this needs funding then the remaining amount needed has to come from other sources like personal savings and income etc.
Having an increased level of home equity can give homeowners greater financial security and flexibility, enabling them to make necessary repairs or renovations on their property without having to take out a large loan, or fund other major purchases such as education fees. Furthermore, having substantial amounts of equity may also allow you to access cheaper loans with lower interest rates since lenders will view you as a safer borrower with less risk involved.
No – unless used towards repairs / renovations which could increase its overall market value over time. Otherwise just having access doesn’t necessarily affect its current values.
Before taking out any form of loan against the equity in your home consider seeking professional advice from a qualified finance broker who will be able to provide advice tailored specifically for one’s current circumstances
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