One of the benefits of being a homeowner is that your home can be leveraged to help secure your financial future and improve your long-term financial situation.
Home Equity refers to the difference between your property’s market value and any outstanding debt you have on this property. Usually this means that over the years, as mortgage payments are made and if your property value increases over time, your home acquires incremental value which is also known as equity. This equity may be utilized in the form of home equity financing to help cover the cost of expenses which are usually geared towards the creation of further wealth.
We turn to Clyde and Julia Holmes as an example:
Let’s say Clyde and Julia purchased their home many years ago for $1,200,000. Their home has appreciated in value and is currently worth $1,500,000. Julia and Clyde have been aggressively paying off their mortgage and the amount still owing on their mortgage is $500,000. When we take the difference between the property value ($1,500,000) and outstanding debt ($500,000), we are left with $1,000,000 which is their home equity.
Next, we examine three ways the Holmes family may utilize the equity in their home:
- Investment for Retirement
While their anticipated retirement dates are many years away, Clyde and Julia recognize the importance of routinely setting aside funds from now to ensure they can afford to take care of themselves after they retire. They may choose to use their home equity to fund long-term investments that they hope will appreciate in value so that when it comes time to retire, they will be in a stronger financial position.
- Investment in Real Estate
Another approach to building long-term wealth is via investment in real estate. Clyde and Julia can either increase the value of their current property with renovations, build an added space that can be offered to a tenant or purchase another property that they can put on the market for rental income.
From the day their daughter Kelly was born, Clyde and Julia began putting aside funds towards Kelly’s education. While they have saved a lump-sum over the years, University fees along with the added expenses of supplies and all other incidental costs are quite sizable. To fully cover Kelly’s University expenses Clyde and Julia keep in mind that home equity financing may be the way to go from them to fund Kelly’s tertiary education.
We hope these three scenarios help give you a better idea of how home equity financing may also work for you. Don’t hesitate to reach out to us here to discuss more about home equity and what may be the best fit for your financial goals.