Whether you’re selling, looking into refinancing, or seeking financing options for home improvements, debt consolidation, or anything else, you’ll be thinking about equity. Before you can make the best decision for your unique circumstances, you need to understand how much equity you have in your home.
Here, we’ll dive into home equity, tell you how to calculate the equity in your home, explore the ways you can leverage that equity, and what you can do if you don’t qualify for traditional financing products. Ready? Let’s dive in.
Understanding Home Equity
Home equity refers to the difference between your home’s value and the amount you owe your mortgage lender. This number can be positive, but it can also be negative in rarer cases.
How to Easily Calculate Your Home Equity
Calculating the equity in your home is pretty straightforward. The process involves the following steps:
1. Determine the Current Market Value of Your Home
Start by figuring out how much your home is worth. A home appraisal is the simplest and most reliable way to do this.
Home appraisals typically cost a few hundred dollars, but that price is generally worthwhile. For example, if you’re selling your home, an appraisal will ensure that you set the right asking price and don’t sell yourself short. Alternatively, if you’re applying for a line of credit like a home equity loan, having your home appraised may change the size of the loan you’re eligible for.
2. Subtract Outstanding Mortgage Balances or Liens
Once you know the market value of your home, you can subtract the outstanding mortgage balance, as well as any liens or unpaid property taxes there could be against your home.
Say your home was recently appraised at $300,000 and you owe $200,000 on a mortgage. $300,000 minus $200,000 equals $100,000. That’s the amount of equity you have in the property.
What Else Affects Your Home Equity?
While your mortgage payments are the biggest factor influencing the amount of equity you have in your home, they’re not the only thing. Other factors can increase or affect the amount of equity you have. The following are three factors of the most critical equity contributors to be aware of:
How Much of Your Mortgage Principal You’ve Reduced
When you make mortgage payments, you reduce two things: the principal, or the balance of the mortgage, and the interest on the mortgage.
When you start making mortgage payments, a lot of each payment goes toward reducing the interest, but over time more goes toward reducing the principal. The more of the principal you’ve paid down, the more equity you have.
Home Price Appreciation:
Over time, the market value of your home typically increases. In fact, the median home price in the U.S. has increased by nearly 30% since 2020.
Home Improvements and Renovations
You can also increase your home’s value by making improvements and more extensive renovations. For example, things like making your home more energy efficient with new windows, remodeling or adding a bathroom or bedroom, or finishing spaces like a basement or attic to increase your home’s livable square footage can increase your home’s value when it’s time to sell.
However, many of these improvements also make your home a better place to live, and you may be seeking to tap into your home equity to make these improvements. That said, let’s take a look at some ways you can tap your home equity for your needs, whether you want to make renovations or consolidate debt.
How to Access Your Equity in Your Home
Home equity plays a huge role in your overall financial stability. In most cases, your home, or more specifically, the equity in your home, is one of the most valuable assets you’ll own. This is because it can be used as leverage when you need to access cash.
If you have enough equity built up in your home, you can use it in several different ways. The following are some of the most common ways to access the equity in your home:
- Home Equity Line of Credit (HELOC): A HELOC gives you access to a certain percentage (usually 80-85%) of your home equity, which you can use as needed. HELOCs come as a credit line that you can access as you need, with a variable interest rate.
- Home Equity Loan: A home equity loan is similar, but it allows you to borrow a certain percentage (usually 80-85%) of your home equity. Home equity loans come in a lump sum, and they tend to have a higher interest rate the HELOCs do.
- Cash-out Refinance: A cash-out refinance replaces your current mortgage with a new, larger mortgage, giving you the difference to use as needed. Like HELOCs and home equity loans, you can usually access about 80% of your home’s value with cash-out refinancing.
General Requirements for Equity Financing
While each type of financing has its own unique requirements, most equity financing has relatively similar eligibility requirements. These include things like having:
- An income: Without an ability to pay back your loan or line of credit, lenders can’t confidently extend you funds.
- A strong credit score: A credit score of 620 is usually seen as the minimum, but a score of 700 or greater will give you a better chance of qualifying.
- A low debt-to-income ratio (DTI): While some banks will accept a debt-to-income ratio as high as 40%, you’ll have the best chance of success with a DTI lower than 30%.
But what if you don’t meet those criteria? Does that mean you’re stuck? While traditional borrowing enables many homeowners to achieve their goals, their strict lending criteria bars millions of other homeowners from accessing the financing they need. That is, until now.
Access Your Home Equity With SKYDAN
Getting rejected by traditional lenders hurts. And it’s even more frustrating when you need financing to better yourself or protect your livelihood, be it paying off your debts, late property taxes, medical bills, or anything else. We know it hurts, and that’s why we decided to give homeowners a new option.
With SKYDAN, you can qualify to access your home equity with just a single requirement: have equity in your home. To us, your credit score doesn’t matter, your debt-to-income ratio doesn’t matter, and your income doesn’t matter. Why? Because we’re not a bank, and we’re not a lender. We’re a real estate investment company.
Here’s how our program works:
- SKYDAN buys your home, but you don’t move out. This gives you access to the equity you’ve built up.
- You then agree to lease the home back from us at a mutually-agreed upon amount, not exceeding 2 years.
- Rent is deferred until the end of the agreement, meaning no monthly payment is due.
- You may then purchase the home back (original price + deferred rent) OR sell the property, at current market value, receiving all additional equity.
We know. It sounds too good to be true. That’s what our customer Sally told us. But it’s not. SKYDAN is the “real deal,” as she put it. We’re not interested in making money by putting you in debt, like banks and lenders do. We’re committed to helping you take control of your life.
To get started with SKYDAN’s program, see if you qualify today.
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