Equity, or the amount of funds available in your home above and beyond your mortgage, can be a crucial thing to know for any homeowner or investor. Effectively, it is the amount of money that you would receive cash-in-hand if you sold your property and paid off your mortgage today.
For those looking to invest, the level of equity in your property can be the difference between leaping quickly into your next investment through refinancing or having to wait until you’ve accrued enough funds in savings to buy again. Equity from an increase in the market and from diligent repayments can therefore be a powerful tool for investors and even home owners who want to use their primary place of residence to leapfrog into an investment portfolio.
For homeowners, equity in a property quickly allows you to determine your overall wealth position, potential buying capacity and provides some peace of mind in the event of the local house prices changing. Homeowners may also want to refinance to fund some other ventures, such as renovations.
Understanding the level of equity you hold today is crucial. So how do you work out what level is in your property?
Effectively, you need to know two simple pieces of information:
A) How much do you owe on the property?
B) How much is the property worth now?
The amount of equity you have in your home is B minus A.
To work out A, consider what your repayments have been and consider calling your lender to get an up to date explanation of the balance. Paying down lump sums and extra repayments will quickly push your equity higher and it’s not always clear day to day specifically how much you owe.
To determine B, you may want to consider obtaining real estate agent market appraisals or paying for a professional valuation. Appraisals, or using local market comparisons, can assist with deciding whether or not there is the chance you have enough equity to use without an initial outlay. Often, most peoples’ first indication that there is money in the home is when a neighbour sells for a substantial figure.
During your time of ownership you may have had substantial renovations and the market may have increased significantly. Savvy buyers may have even purchased below market value initially. When a lender assesses your home for refinance, they will obtain a professional valuation, so it is often worth opting to pay a few hundred dollars for this report if you feel there is a chance your equity level is high.
If the result of the equation is that the borrower owes more than the property is worth, then you are left with what is called “negative equity”. Effectively, if you sold today and used the funds to pay down your debt you would walk away without a property and with debt still owing. This is not a situation many would be calm facing and it’s not surprising that many homeowners like to purchase with a substantial amount of their own funds upfront as a deposit. The more equity in the property the more protected the owner is from market movements that could leave them owing more than the property is worth.
Usually, many homeowners have more equity in their property than they’d have thought, while others, upon understanding how crucial equity can be, will be willing to bump up their repayments to get to this point. If you have held your home for a lengthy period of time without considering the increase in value, it may be worth having a look at online listings that compare with your home to estimate whether refinancing and using equity is something to look into.
Remember, to refinance to use your equity you do need to leave a portion in the home – usually around 20%. These equations tend to differ from lender to lender, and the figure that remains after these deductions is what is called “available equity”.
Those wishing to access their equity will still have to jump through the necessary hurdles to obtain a new loan. Make sure to factor this in and speak to a broker when undertaking your calculations as they can explain to you the process and the different requirements of each lender.
- Equity can help you purchase another property sooner
- It can be increased by market movements, renovations or extra repayments
- Having a good equity ‘buffer’ will provide peace of mind
- Appraisals and valuations can assist in determining equity
- Stay in touch with agents
- You may not be able to use all your equity in your next purchase
- Speaking to a broker will be useful