Of all things related to owning a home, equity may be one of the least understood, as well as one of the most important. On the surface, it seems easy to understand: equity is simply the current market value of your home minus what you still owe on it. But, really, there’s a lot more to it than that, especially as it applies to home buyers and sellers. So let’s take a look at 5 things you should know about home equity when buying or selling a house in Kauai.
1. What Home Equity Is
Our first step, then, is to determine what home equity actually is in order that you can know how to build it and use it.
“Simply put,” as we just mentioned, “home equity is the current value of your home minus what you still owe on your mortgage. If you come up with a positive number, you have equity.” And the major factors that determine how fast and how much it grows (or even decreases) are “property values and how much principal you pay down on your mortgage. Usually, it’s a long-term effort, meaning the longer you are in your home, the more equity you can build. It doesn’t happen overnight.”
To figure out how much equity you have, you’ll first need to figure out your Kauai home’s current market value is and do your calculations. To do this, you can use any of the available online home equity calculators. Even better would be to enlist the aid of a Kauai agent. To find out more about this, just call 808-634-4518.
2. How Home Equity Works
Now, let’s examine how home equity actually works in practice . . .
The first thing to keep in mind is that building equity typically is much like “investing in a long-term instrument, like bonds. Your money is, for the most part, locked up and not spendable. There are some ways to tap into this equity, but generally, wealth is created over years as your share of ‘free and clear ownership of the house increases.
But sometimes, owing to dramatic changes in local market conditions, you may see steep gains or losses in your home equity. Such changes are currently in play in markets across the country right now.
“For example,” according to industry watchers, “rapidly rising home prices are contributing to a significant equity increase for homeowners with mortgages across the country. According to data provided by CoreLogic, these homeowners have amassed nearly $3 trillion in equity growth since the second quarter of 2020 – up 29.3% year over year. In September 2021, the median existing-home price was $352,800 in September 2021, according to the National Association of Realtors, a 13.3% increase year over year.”
On the flip side, plummeting home prices can destroy equity. “During the Great Recession, for instance, median sale prices plummeted by over $14,000 from the last quarter of 2008 to the first quarter of 2009.”
For a better understanding of the forces at play in your market, contact a Kauai agent at 808-634-4518.
3. Ways to Use Equity
When it comes to buying or selling a house in Kauai, there are a few ways you can use or leverage your home equity . . .
HELOC
A home equity line of credit (HELOC) “is a revolving line of credit that uses your house as collateral. The amount [of equity] you have determines how much you can borrow. Like a credit card, you can tap into it when you need to, but you have to pay back the amount you borrow.”
You’ll typically get a lower interest rate with a HELOC than you would with a credit card. “Because you use only what you need when you need it,” this is a good option for sellers who need to make renovations, improvements, or upgrades before listing.
Home Equity Loan
With a home equity loan, unlike a HELOC, you borrow a lump sum against your equity rather than a revolving line of credit. “[Y]ou get all the money at once, and must make monthly principal and interest payments. You pay back the loan over a set period of time, with interest that is usually set at a fixed rate.”
Cash-out Refinance
Another way to use home equity when buying or selling a house in Kauai is with a cash-out refinance. It allows you to refinance your mortgage for more than you owe on it, and you can use the cash however you please.
“For example, if your home is worth $300,000, but your mortgage is only $200,000, you might do a cash-out refinance for a new loan of $275,000. You receive $75,000 in cash and start making new (and larger) mortgage payments.”
4. Important Considerations
There are however a few things to consider in determining the best way to use your home equity . . .
A HELOC, which functions much like a credit card, allows you more flexibility than a home equity loan with respect to accessing and utilizing the funds (up to a certain limit and within a certain time frame). But “they also come with higher closing costs and variable interest rates, which may mean paying more over time.”
Also, a cash-out refinance – which “allows you to take on a larger mortgage in exchange for accessing the equity in your home” – can be a bit deceptive. It’s not a second mortgage, but rather a form of refinancing. So although you’re monthly payment won’t increase, the length of the loan extended, so you’ll be paying on it much longer.
Ultimately, though, “if you’re planning to use your money as a lump sum as you would with a down payment, a cash-out refinance or home equity loan will probably make more sense.”
5. Contact the Home Equity Experts
So home equity can be pretty complex when you consider everything involved and there’s a lot for buyers and sellers to understand. That’s why it’s so important for buyers and sellers to work with an experienced Kauai agent if they want to use their equity. So if you’re planning on buying or selling a house in Kauai and want to utilize your home equity, be sure to contact us today at 808-634-4518.