Equity is the difference between how much you owe on your mortgage and the assessed value of your home. If you’ve been fortunate enough that your home has increased in value since you bought it, congratulations! You’re doing it right! Between the increased value of your home and paying down your mortgage, you probably have a decent amount of equity in your home available for your use.
One way to realize this equity is to sell your home. Although you’ll typically have to a pay a number of fees associated with moving and selling, you still get to pocket the equity if you are able to sell your home for fair market value.
There are a few other ways to access your home equity, the most popular being through a Home Equity Lines of Credit (HELOC), a Home Equity Loan, and refinancing. According to the latest Annual State of the Residential Mortgage Market in Canada report, “survey data indicates that nine per cent of all homeowners (860,000 out of 9.86 million homeowners) took out equity from their homes or increased the amount of the mortgage principal within the past 12 months. . . . The total amount of takeout is estimated at $41 billion, and the average amount of equity takeout is estimated at about $47,600. Out of the $41 billion, $30 billion was via increases to mortgage principals and $11 billion was via HELOCs.”
You shouldn’t cash out just because the money is available, but if you have some life plans that you’ve been considering (or delaying), using your home equity could be a smart way to make them happen. Here are some smart ways that you can use your home equity to improve your lot.
- Paying down debt
- Buying property
There are other reasons to use the equity in your home that aren’t as sound. Some people may be tempted to use the money in order to invest, for example. In fact, it’s estimated that $9.1 billion (22 per cent) of the home equity used in 2016 was for investments, according to the report. That's not to say that using the money to invest is never a good idea, but the problem with this is that with most investments, you’re not guaranteed a specific rate of return, and therein lies the risk.
Remember, though, that using your home equity isn’t free money; you do have to pay it back, so you really only want to use it for things that are going to benefit your bottom line. Not to mention that, unlike using a credit card, taking a loan against your house and defaulting on paying that loan back can result in you losing your home. If you do use some of your home equity, be cautioned not to scrape the bottom of the barrel. The equity in your home is a safety net for anything from a downturn in home values to capital in an emergency situation. It can be a great resource if used wisely, so you want to make sure that you have a plan in place to pay it back. Using home equity to go on vacation or take care of your day-to-day expenses can bite you in the end if you’re not careful.