When many of us buy a property, we do not think about the propertys equity and how this will grow over our years of ownership. Instead, we only focus on the amount we owe on the home, and how we can pay this off. But, the truth of the matter is this unused equity can be used to help you grow your wealth, providing that you take advantage of it when the going is good.
What is Equity?
The equity you have in a property is the current market value of your home, less what you owe on the property. For instance, lets say you bought the home 20-years-ago for $250,000. However, in todays market, your home is worth $650,000. Plus, over the last 20-years you have paid $200,000 off the loan. So, you owe $50,000 on the property.
Based on this, you have $600,000 in equity that you can use to build your wealth, less 20 percent which a lender requires you to have on your existing loan. Thus, your equity is worth $520,000.
How to Use Your Equity
There are many ways that you can access your equity to build your wealth. You can either use your equity to secure an another loan, top-up your existing loan, or to take out a line of credit. Lets look at these in detail.
Security to Secure a Loan:If you are looking to buy an asset, then your lender will allow you to use your home as security against a loan. For instance, lets say you want to buy an investment property, but do not have the deposit. You can use 20 percent of the value of your owner-occupied home to cover this amount. This approach effectively means that your lender has increased interest in your property if you cannot manage your home loan repayments.
Home Loan Top-up:This method allows you to increase your existing home loan amount, much like increasing your credit card limit. The advantages of this mean that you do not have to apply for another loan as your details are already on file. You may also save on fees and other charges. However, you need to remember that by increasing your loan amount, your monthly repayments may also rise.
Line of Credit: A line of credit loan is separate to your existing home loan, but it is taken out against your property. This method works like a giant credit card. Therefore, you only pay interest on the amount of money that you have used. This method gives you greater flexibility, but it may also attract higher interest rates, and can be a trap if you do not manage your spending.
How to Access Your Equity with Ease
As with any other financial decision, accessing your equity is only an option if you can afford the extra repayments and manage the risk. If you ca not, then consider other options. If, however, you feel that accessing your equity is favourable, then you can make this process easier by doing the following.
1. Make sure your property is ready for evaluation: Before you can access your homes equity your property will be valued. This evaluation will determine how much your home is worth. Therefore, you want your home to have the highest possible value. To do this ensure that similar homes, at least three, have been sold in your area and the presentation of your home exceptional.
2. Have current documents: If a firm employs you, then find three recent pay slips and your employment contract. As well as, a copy of your latest bank account statements and evidence of other income you receive.
If you are self-employed, then find two years worth of financial data as prepared by your accountant. Also, print out a profit and loss for the current financial year if you’re part way through the year.
3. Do not borrow too much:You may have more than enough equity to borrow a great deal of money. But, before you commit to anything consider the costs and if you can afford the extra repayments.
Written by eChoice
Since 1998, eChoice has helped more than 50,000 Australians secure a home loan through its network of over 25 lenders and hundreds of loans. Best of all our service is cost and obligation free!