The NWM Blog

Written by Northwest Mortgage

Published on Fri, Jun 19, 2020, Last Updated on Fri, Jun 19, 2020

Homeowners can build equity and then tap into it to make renovations to their home, repay loans, or remove high-interest credit card debt. After hearing this, did a light bulb go off in your mind and make you think – “Hey, I should increase my home equity.”

Yes, you should.

The higher your home equity is, the more benefits you have. If you want to receive all the wonderful benefits related to increased equity, you’ll need to increase it first. We’ll tell you a few ways to increase your home equity, but before we can get to that, let’s tell you what equity is and how it works.

Home Equity: What It Is, How It Works, and How It Grows

Home equity is the difference between your home’s current worth and the amount you own on your mortgage. Here’s how home equity works:

Your home appraises for $400,000. However, your balance is $285,000. This means you earned $115,000 in home equity and have 30% homeownership, whereas the bank holds the remaining money. Even then, the $115,000 is yours, and if you want to refinance your home and cash out, a percentage of the money will still be available to you.

How does home equity increase? When your home value grows, your home equity grows with it. Your home’s value can increase after a remodel or simply because you own a property in a real estate market that’s appreciating. Let’s say you took out $40,000 from your home equity to pay for kitchen renovation. This increased your home value by $70,000, resulting in your investment growing by $30,000.

Improvements in your neighborhood and local economy can also increase your home equity. The more payments you make to reduce your loan, the more your equity grows. So, work towards reducing the initial loan to increase your equity and receive your reward for doing so.

The Benefits of Increasing Home Equity

When you increase your home equity, you’ll receive the following benefits:

1. Remove Private Mortgage Insurance (PMI)

You can file a request to remove the PMI once your equity goes over 20%. Once your equity goes over 78%, PMI payments will stop automatically. PMI is an added expense, and one Northwest Mortgage is happy to help you navigate removing.

2. Savings Will Increase

When you buy a home, you start saving money whether you intended to or not, which is why it’s called a type of forced savings. Saving money isn’t always easy, hence why having a backup in the form of home equity can get you out of a tough financial spot. Increasing your home equity saves you more money in the long-term.

3. Borrow Against Your Home Equity

If you need to, you can borrow against your home equity. You can’t immediately cash out the home equity and use it for something else, but you can use the savings to make home improvements. Banks also offer several products that let you borrow against it, such as getting a line of credit.

If you’re a senior citizen, you can benefit from a reverse mortgage. A reverse mortgage allows seniors to borrow against their equity while living in their home. It also allows them to get money in a form that’s convenient to them, such as a lump sum or line of credit. They can use the money for any purpose without any restrictions and can repay the loan until a maturity event occurs, such as the passing of the previous borrower or the sale of the home.

Northwest Mortgage can provide you with more information on increasing your home equity, refinancing your home, and removing PMI.