One benefit of owning a home is getting to build equity in it. Equity refers to the portion of your home you own outright. You can calculate yours by taking the market value of your home and subtracting the balance you owe on your mortgage. If your home could sell today for $400,000 and you owe $200,000 on it, that leaves you with $200,000 in equity.
Right now, U.S. homeowners are sitting on a record level of equity. During 2021’s third quarter, collective home equity rose to $9.4 trillion. This doesn’t mean every single homeowner in the U.S. has positive equity, but it means that many do. And that could open the door to a few different opportunities.
You can borrow against your home affordably
Equity is something you have the option to borrow against, whether in the form of a home equity loan or a home equity line of credit, or HELOC. Now, this isn’t to say you should borrow against your home for no good reason. Borrowing against your home still means taking out a loan — one you have to pay back or risk losing your home.
But if you have a good reason for needing to borrow — say, you want to do renovations, pay off credit card debt, or start a business — then borrowing against your home could end up being a cost-effective way to do so. You’ll often pay less interest on a home equity loan or HELOC compared to other borrowing choices. And because home equity levels are so high right now, home equity loans and HELOCs are fairly easy to qualify for.
You can also borrow against your home equity via a cash-out refinance. With a regular refinance, you borrow the exact amount of money you owe on your mortgage. With a cash-out refinance, you borrow more than that amount and can use the extra money for any purpose.
You can sell your home at a profit
If you have a lot of equity in your home, you may have a chance to sell it at a nice profit. Say you’re sitting on $200,000 worth of equity because your home’s value has increased from $350,000 to $400,000. If you sell today and get a $400,000 offer, you’ll walk away with more money — cash you can use to buy a new home with.
Of course, one thing to keep in mind is that if you’re looking to upsize, what you gain in the form of a higher sale price for your home, you may lose in having to pay more for a replacement home. But if you’re looking to downsize, now’s a good time to do it. Say you walk away with an extra $50,000 upon selling your home. If you overpay for a smaller one by $20,000 due to today’s higher prices, you’ll still come out ahead financially.
Home equity levels are high right now, but we don’t know how long they’ll last, as that will depend on when home values start to drop. As such, it pays to consider the ways you can use your current equity to your advantage.
This article was written by Maurie Backman from The Motley Fool and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to email@example.com.