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13 Aug

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In today’s economy, it is important to invest your money with an eye to long-term gains over a significant period of time. With home ownership, you enjoy the immediate value of having a stable, comfortable place to live while also building home equity through the years. So, what exactly is home equity, and how is it calculated?

Home Equity and How to Calculate It

The amount of home equity you have represents the portion of the property’s value that you own as opposed to the portion your lender owns. It is calculated by taking the estimated current market value of your home — as quoted by a licensed professional — and subtracting the amount left owing on your mortgage.

If you have bought your home in cash or have paid off your mortgage in full, you are at 100% home equity status. If not, keep in mind that while the amount owing on your mortgage is a straightforward number, there can be changes, both natural and introduced, in the market value of your home over time.

Factors that Affect Home Equity

The amount of equity in your home at any given time is affected by fluctuations in the property market, by what amount of the principal of your home loan is left owing, and perhaps by forced appreciation via targeted home renovations.

Changes in the property market at the local, regional, national, and international levels can be very difficult to predict. The economy is volatile at times, so you need to have stamina while building home equity as it is often a marathon rather than a sprint. Consider the financial crisis of 2008, in which huge losses in global property values were suffered.

In terms of what amount of the principal of your home loan is left owing, it is important to not only make your monthly mortgage payments but also pay additional amounts when it’s financially viable for you and when it’s allowed under the terms of your mortgage payment plan. When renewing your mortgage or establishing a new one, it can be advantageous to choose a payment structure that allows for additional intermittent payments throughout the years without penalty.

In many housing markets it’s a good idea to make renovations designed to directly increase the market value of your property. You will often hear that the kitchen and bathrooms are the most important rooms to renovate to increase a home’s value, and this is often true. But also consider the flooring, fixtures, and the exterior of the home. Before committing to any renovations, consult a real estate professional, an appraiser, and a construction expert.

Leaving a property unrenovated for twenty years or more risks depreciation of the property value. If your house is the only one on the block or in your neighbourhood left untouched for years, it can decrease both the value and the chance of actually securing a buyer. It can help somewhat if the home is kept clean and well-maintained despite being unrenovated, but the stigma attached to an outdated property is still present.

The Unique Nature of Home Equity

The beauty of home equity is that it tends to gradually increase in value and gain momentum over time. Other assets bought via loans such cars or boats lose value in the time it takes for the loan to be paid off, or as the saying aptly goes, the moment they leave the lot. Yet property will not usually lose value over time, in fact, it typically increases in the long term. This unique dynamic exists because the continued loan payments reduce the principal debt as the home simultaneously gains market value.

This is why many people across North America with money to invest choose to build a portfolio of properties. Whether kept as a vacation home or leveraged as an income property for short-term or long-term lease, a second home or multiple homes can be a great way to build financial value through the years.

Home Equity Requires Patience

Recently, the length of ownership before to selling jumped from an average four years to more than eight years. This development is a good thing because time is the key ingredient in the growth of home equity. Homeowners who hold onto their property for longer are more likely to build equity. Buyers can be tempted to look for shortcuts such as flipping or gambling on the next hot market, and that strategy can pay off for some. But for most, a shortcut is less valuable than a sound investment in a quality home that you care for, maintain and renovate steadily over time.

Considering a Home Equity Loan

If you’re ready to access the home equity in your property, selling the property is not the only option. Consider borrowing against the value of the home with a home equity loan or a home equity line of credit (HELOC). The key difference is that a home equity loan means you receive a lump sum, whereas with a HELOC you can withdraw from the available funds in chunks.

One strategy that can be profitable is to establish a HELOC that finances your home renovation or repairs over time. One year you might fix or redo the roof. Another year you might refinish or replace the flooring. Then the time might come to change out the kitchen countertops, backsplash, cabinetry and appliances. Soon the bathroom plumbing and fixtures will need refurbishing, and perhaps some lighting updates. The exterior of the home and the landscaping/hardscaping needs regular upkeep and renovation. Over the years and decades, every home requires multiple updates, and a home equity line of credit may be the answer for you.

For more information, please call Canada’s Mortgage Authority at 1-866-417-8805 or contact us here.

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