When I work with buyers, they often don’t understand what home equity is. And sellers sometimes don’t realize there are ways their equity can help them sell. So let’s talk about what it is and what you can do with it.
To put it simply, home equity is the difference between the amount you owe on your property, and its current value. Now, value can be hard to define because there are many applications for it and so there are many ways you can find it. But the main reason why you might be looking for value is so you can better understand how you might be able to leverage your equity. How do we cash it out? What can we use it for? Can we use our equity to help sell our house?
Two ways that you can turn your equity into cash, is to get a home equity loan, or a home equity line of credit, or “HELOC” as they’re called. These are ways that you can use the value of your property to help with things like home renovations or repairs, paying down other debts at a lower interest rate, or just to make large purchases of any kind.
Home equity loans are established as a one-time lump sum of cash, often with a fixed interest rate. They may not be as helpful if you’re not looking to borrow a large sum at one time. Home equity lines of credit are a revolving source of funds, kind of like a credit card that you can access at any time. So there are obvious benefits to one versus the other.
These can be used in various ways. In fact, whatever you need it for, you can probably use it. Because your property and first mortgage are used as collateral for the loan or credit line, this can be a bit risky, but in a pinch this is a great asset for a homeowner. It’s one of the main reasons why home ownership is so desired, because you can use the real estate you own to help you financially in many other ways.
How can sellers use home equity to help sell a house? I’ve covered this before as well in a previous video about bridge loans. This is another type of equity loan that can help you for a short term to access equity, many folks use it to help a sale go through. Say, for example, you are in the middle of a deal and you find out you need about $5,000 to make some repairs in order to help the deal go through. You have plenty of equity in your house, but you don’t have the liquid cash. Your bank may be able to issue you a bridge loan, or a HELOC that can float you the cash needed to do this. Now with a bridge loan, it’ll typically be required that you sell your house as a term of the loan, but it’s not that uncommon that two steps into a deal the other party has you questioning their ability to finance, or maybe just their willingness to work with you. Those situations can be scary. This is where a HELOC could help, because it’s not contingent on the sale.
So, in summary, your home equity is cash value. It becomes your profits when you sell. Or it helps you in times of need. In other words, because your equity can be used in so many ways, it’s a good reason to invest in real estate.
Hope this helps, give me a call if you have any other questions.