Leveraging Your Home’s Equity

Owning your own home creates an opportunity for you to build equity, month after month, through each consecutive mortgage payment made. Which is why owning a home can be a lucrative investment opportunity, even as you use it as your primary residence. Keep reading as we discus leveraging your home’s equity.

But what is equity exactly? You have likely heard the term before, but do you really understand what it means and how it can benefit you?  

Understanding home equity

Home equity is the difference between the remaining balance of your mortgage and the current market value of your home. As you make payments towards your mortgage you decrease the amount you owe, simultaneously building your equity.  In other words, equity is the amount your home has earned over time. Typically, this means if you were to sell your home, the equity would be the total you are entitled to keep after the mortgage, and any liens tied to the home, have been repaid. If the remaining balance on your mortgage is higher than the current market value of your home, you have negative equity. Alternatively, if the remaining balance is less than the current market value of your home, you have positive equity.  

Positive equity

Sometimes life takes unexpected turns that can pose financial challenges. Owning your own home with positive equity can ensure a safety net of funds. Funds available for you to leverage even without having to sell your home, should the unthinkable occur.  

Your positive equity even has the potential to improve your financial standing, if used correctly. We turned to financing mortgage consultant Bill Steward at Penrith Home Loans to help us explore this in more depth.  

Bill explained, with enough equity available, a cash-out refinance can potentially cover, or partially cover, the funds needed in an emergency. The best part is you can do this without having to sell your home. Bill also shared, “Once approved, you can use a cash-out refinance loan for anything.” There is no oversight or restrictions on how the funds are used. However he encourages you to exercise caution as, “It is still a loan you will have to repay.” Further suggesting to, “Keep this in mind before using funds from a cash-out refinance to splurge on “non-essential” items that you may not have much use for.” Instead, he recommends, “…money from a cash-out refinance be used for investments that can increase the value of your home or simplify your cash flow, and not for things like everyday expenses.”  

Let’s dig deeper into a few ways that funds from a cash-out refinance loan can increase your financial standing instead.  

Home improvements

Often times remodeling increases the value of your property. For example, switching to energy-efficient appliances, or adding a bedroom or bathroom can increase the value of your home. However, Bill warns, “…be wary of ‘improvements’ that may not add as much value as you originally thought”. He suggests working with your trusted real estate agent and mortgage consultant to determine if the desired home improvements will return enough bang for your buck. If you are not currently working with an agent, connect with us here.  

Consolidating and reducing debt

Did you know a cash-out refinance typically has lower interest rates than credit cards? Using these funds to pay off your credit card debt can ultimately help you save money in the future. If you are struggling to get on top of your debt, this might be an option to consider helping reduce your debt and build financial wealth. Be sure to discuss your unique situation with your trusted lender and financial advisor to see if this is right for you. If you don’t have a relationship yet with a trusted lender, Bill Steward is an excellent resource you can connect with here. 

Repay student loans

Student loans can take years to pay off. Bill explains, “Leveraging the equity you’ve built into your home to pay down federal or private student loan debt is a great strategy to consolidate and eliminate a common, yet heavy burden.” 

Cover the cost of medical bills

Once again, Bill provides helpful solutions, explaining, “Instead of having to worry about defaulting on your medical expenses, you may be able to use the equity in your home to cover the cost. Dealing with a medical emergency is already stressful enough – you should not have to worry about where the money is going to come from.”  

When considering the use of a cash-out refinance it is important to remember you must repay what is borrowed at the new terms agreed upon. Be sure to pay close attention to your new refinancing terms. Pay special attention to the interest rate. Understand what the new rate will do to your monthly mortgage payment. If you wish to reach Bill Steward NMLS #754408 at Penrith Home Loans and discuss the possibility of cash-out refinancing, you can contact him by clicking here or call him at 425-330-2990.  Perhaps you wish to start building equity and a safety net of funds for your future by purchasing a home; connect with us here.  

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