How To Use Your Home Equity To Improve Your Personal Wealth

Darcy Schanck Financial

 What is Home Equity & What Can it do to Help Improve Your Personal Wealth?

The equity in your home simply refers to the amount of money that you own in it. You take the fair market value of the property and remove any liens on it. So if you used cash to purchase a home that means you own 100% of your home’s equity. There are no liens on it because you did not borrow money to purchase it.

But if you bought that house through mortgage financing, like everyone usually does, you start by owning only the same value as your down payment. In Canada, the typical down payment expected of a home buyer is 5%. So you start by owning only 5% of your home’s total value. The rest is with the mortgage lender.

As you make payments on your mortgage every month, your home equity increases because the liens on your home are decreasing with every payment; and as the fair market value of the home is also increasing, the equity in your home will do the same.

You have to remember that there are several factors affecting the value of a home like the location, the state of the property and the current real estate market trends. To get a quick look at the possible value of a property in any place, have a look at the current prices of the homes for sale that are comparable to the one you are assessing in the same neighborhood.

For instance, based on the data that we got from CREA.ca, the average price of a home in Ontario is at $423,691 as of February 2014. A year ago, that price was $392,962. That is a 7.8% year on year growth. Is it safe to assume that the home equity that you own in your Ontario property increased? Yes it is.

Investing in a house is a great idea because of the fact that your home equity grows. That means its value rises but only if the housing market is in good condition. In terms of the Ontario housing market, the housing forecast suggests that the prices for homes for sale will continue to rise. Based on an article published on MacLeans.CA last December 2013, it is expected that the housing prices in this province will increase by 4% every year until 2016.

While it is not entirely accurate to base your home’s equity with the rising sale prices, it should give you some idea about where the housing market is going.

But what does that mean for your own personal wealth?

Here’s the thing, when your home equity is rising, that signifies that the money you have invested in it is also growing. If for instance, you bought your home for $300,000. In case you own 50% of the equity that means you have $150,000 in that property. If the value of your home have shot up to $400,000 since you last bought it, that means your 50% home equity is now valued at $200,000. Your initial investment went up by 25%. Of course it is a bit more complicated than that but this should be the simplest way to make your home equity assumptions.

If you want to access that money, you can take out an equity line of credit, a second mortgage, or re-do a completely new first mortgage depending on your situation in order to cash out your home equity. You can invest it as a down payment to a rental property, or reduce high interest debt through debt consolidation. This will increase the money you owe in your home, but it can work in your favor if you know how to manage your credit well.