Home Equity Can Work for You

Home equity can be a confusing notion for those who are unfamiliar with economics and finance. However, it can be broken down into terms that are easily understood by the layperson and can be used to your advantage. Home equity is essentially the amount of home that you own. This essentially means the fair market value of the home minus the debt you owe on the home. When you purchase a home and start to make payments, any portion that goes toward paying the principal on the loan builds equity. For most people, their home is the most valuable thing that they own. This value is however, inherently illiquid, meaning the value is not easily moved around from place to place like say, money in your savings account. Its value can be accessed however.

How to Build Your Equity

In order to utilize the equity in your home you must first build it. This can be a long process that occurs slowly over time. For instance, if you just bought your home, you do not have much equity if you have any at all. However, as you make more payments over time, or your home appreciates in value, your equity will grow. You can speed this process up if you wish by paying all extra income toward the mortgage every month. This will help your equity grow faster. Once you have a decent amount of home equity, you then have the option of using it if you so choose.

How to Utilize Your Home Equity

You can utilize your home equity in several ways. People typically utilize their home equity in the form of a home equity loan or line of credit. Home equity loans can also lead to tax breaks for some. Home equity loans can be used for many things but here are some common examples of how people choose to use their equity:

1. Home improvement project: Many people use a home equity loan to make improvement or additions to their existing house. Be careful though, you want to maximize the return you get on your investment; do your research before you improve.
2. Education: Some people choose to use their home equity to finance their child�s college education. While there are other options, if you have failed to adequately save for your child�s college fund, this may be a good option for you.
3. Purchasing an Automobile: If you are concerned with having low monthly payment on your automobile this may be the right choice for you. However, beware of the lengthy term of home equity loans; you may end up paying significantly more than if you were to purchase the car with a traditional auto loan.