Are You Equity-Rich?

One in four U.S. homeowners is equity-rich. And the good news is, this is a position anyone can achieve, no matter how grand or modest the home.

So, what does that mean exactly?

Equity is the difference between the fair market value of a property and the amount still owed to the lender. If, for instance, if your home is worth $300,000 and your mortgage balance is $100,000, you have $200,000 in equity. To put this in perspective, when you sell your home, you pocket the equity.

You are in a positive equity position if your house is worth more than you owe, as in the example above. You are in a negative equity position (also called underwater) when you owe more than your house is worth. This happens when you over-improve a home or your neighborhood sees depreciation rather than appreciation of property values.

Being equity-rich means your current loan-to-value (LTV) ratio is 50% or lower. You can determine what percentage you LTV is with a simple equation:

Loan amount ÷ appraised value = LTV

Outstanding loan balance ÷ appraised value = LTV

Unlike your final exam score in your high school lit class, you want this percentage to below – the lower, the better. A lower LTV indicates that you have more equity, or ownership, of your property. You are considered less risky in a lender’s eyes – less likely to fall behind in mortgage payments, less likely to end up in foreclosure, etc. – and thus will often carry a lower mortgage.

Accessing your equity

It’s best to leave your equity alone if possible. Let it continue to accumulate in value. But if you want to tap into your equity as a resource, you have options. A cash-out refinance is a good option if you need money for home improvements, college tuition, or business start-up funds. You can access money for large expenditures, such as paying off student loans, or high-interest credit cards, by taking out a home equity loan, in which you borrow against your home’s value. You can also sell your home for the profit, which is especially appealing if you are looking to downsize anyway.

Increasing the likelihood of being equity-rich

From holding on to your property for an extended period to the timing of its purchase, there are many steps you can take to heighten the chances of joining the quarter of American homeowners who are equity-rich.

Be a homeowner. Make homeownership a goal. Build equity instead of paying rent.
Purchase a home in a solid market. Research before you buy. Select an area that, historically, has seen home values appreciate.
If you are a homeowner, pay off your mortgage as quickly as possible. Even an extra $100 a month or one payment a year will reduce your interest and grow equity more quickly.
Hold on to your property longer. It takes at least five years to see equity build.
Have as your goal to pay off your mortgage before retirement.
Only tap into your home equity to enhance your investment. Home improvements will increase your home’s value. Resist the temptation to use your equity on purchases that depreciate quickly, such as a new car.

Still unsure if you are on the path to becoming equity-rich? Reach out to the mortgage professionals at Aksarben Mortgage. It’s a good idea to review your mortgage with an advisor annually. Interest rates change, and so do financial circumstances. Aksarben Mortgage advisors can help you navigate these changes so you can experience your good life, including becoming equity-rich!

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.