What is Equity?
Equity is the difference between the current value of your property and the amount you have left on your mortgage loan. You determine the amount of equity in your property by subtracting your current balance on your loan from the current appraised value of your property. The amount of equity increases as you pay your loan balance down or by the value of your property increasing over time.
How to use Equity
Using your equity to your advantage means receiving access to funds based on the amount of equity your property has incurred. The three ways you can do this are:
- Redrawing any extra repayments you have made;
- Applying for a credit increase on your existing loan; or
- Applying for an additional loan using your current property as security.
The biggest reason people do this is to gain access to funds with a lower interest rate than your could get with a personal loan or a credit card.
Some things you need to consider include:
- Restrictions. Make sure you understand any restrictions that might limit how much you can repay during the term of the loan.
- The increase in your monthly payment amount and total loan amount. If you choose to access the equity in your property, the total amount you owe will obviously increase, resulting in an increase of the monthly interest you will pay. Also, if you borrow above your previously agreed loan amount, your monthly payment amount will also increase.
Keep in mind that if you fail to make your payments on time, you put yourself at risk of losing your home. Carefully review your options if you are considering using your equity to your advantage.