Have you owned your Mudgee home for a number of years? If so there is a good chance that you have saved up a reasonable amount of home equity.
What is home equity?
In a nutshell, home equity is the difference between a property’s market value and the outstanding amount owed to the bank. It can increase over time if a property’s value goes up or if its loan is paid down.
It is essentially the amount of your property that you “own” and is therefore a valuable asset.
How it works?
To calculate your equity you need to subtract the amount you owe from the value of your home.
So, for example, if your property is worth $500,000 and you owe $200,000, your equity is the difference between the two figures – being $300,000.
Keep in mind however that while you may have $300,000 sitting in total equity, banks will generally only let you take out 80% of the value of your home, less the debt you still owe against it. This is referred to as your useable equity.
For a home worth $500,000 with a $200,000 mortgage:
- Property value: $500,000
- Value of property at 80%: $400,000
- Minus amount owing on mortgage: $200,000
- Useable equity = $200,000
Your bank may allow you to borrow more than this amount however you will need to take our Lenders Mortgage Insurance (LMI). There may be other factors that the bank will take into account too, such as your age, income and any outstanding debts.
Using your equity
The more equity you have the better, so some people may prefer to build on it rather then spend it. The best way to build your equity is to pay down your loan as quickly as possible.
Your equity can be put to good use for a variety of things though, from property investment to renovations, or other types of investments.
Using equity for investment purposes can be a great way to grow your wealth. Don’t forget that if you already own an investment property you can draw on the equity from this as well.
Before taking out your equity it is always worth getting financial advice. Equity isn’t free money. You will still need to be able to afford your repayments and you are taking away a financial buffer that could be used for a rainy day.