Although selling your home is a great way to make money, you still may prefer your current home and its location, which can be motivation enough to stay. Instead, you can leverage the equity in your home to put more money in your pocket.
Experts anticipate existing home sales to total 6.57 million this year, a 7% increase from last year. Here are three simple ways to leverage your home’s equity to your advantage.
Lenders require private mortgage insurance (PMI) for those who plan to take out a mortgage with a down payment of less than 20% of the purchase price. PMI is different from homeowner insurance, which insures your property. Instead, the PMI protects the lender when borrowers can no longer make their monthly mortgage payments.
Therefore, homeowners can reduce their mortgage payments by getting rid of the PMI. Typically, the PMI requirement automatically stops after the homeowner has at least 20% equity in the property.
Home equity is calculated by subtracting the loan balance from the home’s value. For example, if the current market value of a home is $100,000 and the mortgage loan balance is $95,000, the homeowner owns 5% equity in the property:[($100,000 – $95,000) / $100,000].
However, your home equity increases when your property value increases due to a hot real estate market. For instance, using the same loan balance in the previous example ($95,000), but with a new market value of $150,000, the homeowner now owns over 36% equity: [($150,000 – $95,000) / $150,000].
Another benefit of rising home values is that homeowners can leverage their increased home equity and convert it into “cash” in the form of a Home Equity Line of Credit (HELOC), which is similar to a credit card.
On average, lenders will provide a line of credit that is 75% to 80% of your home’s equity. This percentage is also referenced to loan-to-value (LTV).