Home prices are rising across the U.S. along with interest rates and the cost of living. But it’s not all bad news. When the market value of your home increases, the amount of home equity you have goes up with it.
You can then use your home equity to fund improvements (or anything else!), which will increase the value of your home even more. Read on to find out everything you need to know about the current housing market and how it impacts your home equity.
What Is Home Equity?
Home equity is the difference between what your home is currently worth and what you owe on your mortgage. Here’s a simple way to get an idea of how much home equity you might have:
- Find out the current market value of your home. For example, $240,000.
- Subtract your mortgage balance. For example, $160,000.
- You have $80,000 equity.
- To turn it into a percentage, divide your home equity by the market value.
- $80,000/$240,000 = 33%.
Is Home Equity Based on Market Value?
Yes, as shown above, the market value of your home determines how much equity you have.
James Dickerson, a realtor with Long & Foster Real Estate, explains further: “You’ve probably been hearing a lot about the housing market lately. The market has been under scrutiny as inflation rises, and now rates rise to combat it.
“You could be sitting in your home right now with no intention of selling or buying something new and thinking, “Why should I care?” That’s a great question! The answer is that your home’s value is directly impacted by the market.”
In other words, if home prices rise, the value of your home may rise and your home equity will likely increase. But if home prices fall, the value of your home may fall and your home equity will likely decrease.
How Do You Gain Equity in Your Home?
Of course, you can’t control what happens in the nationwide housing market. Home prices are affected by a range of factors including supply, demand, and interest rates.
But there’s one thing you can control and that’s the amount you owe on your mortgage. Even if the market value of your home stays exactly the same, you slowly gain home equity as you pay down your home loan.
Just think, when you’re free and clear on your mortgage, you have 100% home equity!
Factors That Impact Home Equity
The amount of equity you have in your home goes up and down based on your home’s current market value and your mortgage balance.
Other factors may include:
- The value of homes in the area where you live and how much they are increasing or decreasing year over year
- General trends in the nationwide housing market, including inventory levels and the supply and demand for homes
- The state of the economy, including inflation levels and the unemployment rate
Average Home Equity Growth Rate
With home prices rising, chances are your home equity is growing at a nice rate, too. To find out exactly how much equity you have, you’ll need to order an appraisal.
“Appraisers are independent 3rd parties who determine the value of your home,” says Mr. Dickerson. “How do they do it? They look at comparable sales in your area. So that means, when homes are selling for more, your value increases with them!
“This is especially great news for both the Lancaster and Harrisburg communities. Lancaster has seen a 12.9% increase in median sale price in just the last 12 months, while Harrisburg has enjoyed a 10.0% increase during the same period.”
The Housing Market in Lancaster, PA
The real estate brokerage, Redfin, comes up with slightly different figures. The website says Lancaster home prices were up 22.7% compared to last year. There were fewer homes sold this year and they sold in an average of five days compared to six days.
So what does that mean for your home equity growth rate?
Let’s imagine you live in Lancaster and the current market value of your home is $200,000. If you owe $125,000 on your mortgage, you have equity of $75,000. Then if your home value increases by 22.7%, you gain $17,025 in home equity!
Or, if your home value increases by Mr. Dickerson’s figure of 12.9%, you gain $9,675.
The Housing Market in Harrisburg, PA
By comparison, Redfin says Harrisburg home prices were up 2.1% compared to last year. There were fewer homes sold this year and they sold in an average of five days both this year and last.
So let’s imagine you live in Harrisburg and the current market value of your home is the same ($200,000) and you owe the same amount on your mortgage ($125,000), so you have the same amount of equity ($75,000 or 37.5%).
If your home value increases by 2.1%, you gain $1,575 in home equity. But if it increases by Mr. Dickerson’s figure of 10%, you gain $7,500.
What Should You Do With Your Home Equity?
As Mr. Dickerson says, “The market is crucial to your home’s value and the equity you get to enjoy. If you’re wondering what your home’s worth, you can reach out to a real estate agent for a free market analysis or talk to your credit union to learn about your many available options.”
Once you’ve found out how much home equity you have, you can start thinking about what you want to do with it. Many people choose to get a home equity loan or line of credit to fund home improvements, vacations, weddings, debt consolidation, college tuition, and more.
There are many ways you can put your home equity to work depending on your needs, wants, and goals.
Get a Home Equity Loan
A home equity loan gives you a lump sum of cash and you pay it back in equal monthly installments. You usually get a fixed interest rate that’s considerably lower than a credit card.
The loan is secured by your home and you may borrow up to 100% of your home equity, depending on your qualifications. In the above examples, that means you could potentially borrow up to $75,000!
Get a Home Equity Line of Credit (HELOC)
A HELOC is a form of revolving credit, like a credit card—but the rates are generally much lower. You can choose to use different amounts at different times and only pay interest on what you use, or you can lock in a segment of your line and make fixed payments.
Like a home equity loan, your line of credit is secured by your home and you get a credit limit based on how much home equity you have.
Cash Out Refinance
Many people choose to refinance their mortgage to change the mortgage type (from fixed-rate to adjustable-rate, etc.), change the loan term so they get a different monthly payment, or to see if they can get a better rate and save on interest.
When you do a mortgage refinance, you also have the option to cash out some of your home equity and use the money however you like. Just be aware you’ll need to pay the closing costs for a whole new mortgage.
Leave Your Equity Stored in Your Home
There’s no rule saying you have to use your home equity. In an uncertain housing market, you might like the security of knowing your equity gives you a cushion so you never owe more than your home is worth. Then, when you sell your home, you get to keep the extra cash.
Next Steps: Comparing Home Equity Tools
If you’ve decided you want to put your home equity to work, make sure you shop around for a lender that offers a choice of home equity options with great rates and generous terms. Also, make sure you don’t have to pay closing costs!
Click below to see our home equity options and find out more about how home equity financing can help you achieve your goals.