|
|
Maximizing Home Equity
Maximizing home equity is an option that more and more people
are contemplating. With both home ownership and personal debt on
the rise, a large amount of emphasis is being placed on home
equity as a form of loan collateral. The reason for this is
simple... equity allows lenders the security of a high-value
item as collateral while allowing you the ease of dealing with
matters of paperwork instead of tangible objects when securing a
loan. Unfortunately, a large number of people are unsure of
exactly what equity is and are even more unsure of how to use it
effectively.
If you are one of these people, don't worry... the information
presented below is here to describe what equity is and the most
common ways that it's used, as well as when to use it, when not
to, and how to get the most out of it when you do decide to use
it.
What Equity Is and How It's Used
Equity is a measure of how much of your home or other real
estate you actually own, and as such is a measure of how much
your property is actually worth without the remaining mortgage
lien on it. It is equal to the percentage of your mortgage that
has been paid to date, and it's value is determined by
subtracting the remaining mortgage amount from the total value
of your property.
It is used most often as collateral to secure loans or lines of
credit, the uses of which range from debt consolidation and loan
refinancing to automotive financing and home improvement.
Borrowing against equity reduces the amount of equity that you
have in your home (since that portion is once again under a
lien), but the remaining equity still continues to grow over
time.
When to Use Equity and When Not to Use It
As equity grows in value over time and takes time to build to
significant levels, it's not always appropriate to use your
equity as collateral. Generally, you should only use your equity
once it has risen to at least 25% or more of the value of your
home (though the higher the percentage is, the better); even
then it should only be used when the loan or credit line is for
something important.
If there are alternative forms of collateral that can be used to
secure loans or credit lines while your equity is growing, they
are usually a better option... as your equity begins to grow
over 50%, though, this becomes a bit less of an issue.
On the other hand, equity should not be used as collateral for
frivolous loans or for high-risk investments unless you have
some alternate plans for loan repayment... and even then it's
best if you find some other form of collateral since there is at
least a chance that you'll have nothing of value to show for the
loan afterwards.
Enjoying Your Equity
It's important to remember that equity represents an investment
that you've made over years, and as such should be considered an
acceptable form of collateral for many loans after is has had
several years to grow in value.
Many individuals allow their equity to grow until the house that
they're paying on has been completely paid off, and then
establish credit lines to help them prepare for retirement or to
do the things that they've always wanted to do.
While it should not be treated frivolously, it should also not
be feared... the most important thing is making sure that it is
used for something significant, so that the repayment of the
equity loan isn't something that you regret.
You may freely reprint this article provided the following
author's biography (including the live URL link) remains intact:
|
|
