Equity often gets touted as the key to any given borrower’s future. Here, we provide a brief outline of what equity is and what you can do with it.
If you’ve spoken with a mortgage lender or any other self-professed property expert they will tell you the equity in your home is the key to your future plans. But what is equity?
What is equity?
Defined at its most basic, equity is simply the difference between the value of a home and how much you have left owing on that property’s mortgage.
To explain further, let’s say you buy a property for $500,000 and you have a home loan against that property with a balance of $400,000. In this scenario, you will have $100,000 worth of equity.
Is paying down my loan the only way to grow equity?
Certainly not! Paying down your home loan is definitely one way you can take control in increasing the amount of equity in your home. However, let’s not forget that property is an asset that can rise in value. As its value grows over the years, the gap between how much it’s worth and the amount owing on your mortgage can get wider and wider, and leave with substantially more equity to work with.
Why do I want to grow my equity?
Those people advising you about the benefit of equity weren’t wrong. Equity is essentially wealth sitting dormant in your property. It can, however, be “unlocked” for a number of purposes. It can be used as security for loans, and you can even leverage it to buy another property, rather than saving up a whole new deposit.
What the real experts will do is then rent this investment property out to tenants, and receive a second stream of income. This revenue can then be put into the original home loan, helping you pay if off quicker – pretty nifty right?