Homeowners Are Gaining Equity. Here's Why That's a Good Thing

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More home equity means more borrowing options, and that's an important thing to have during these turbulent times.

Your home equity is one of those things you probably don't think about until you really need to. But if you ever need to borrow money, your home equity could be your saving grace.

Such may be the case for many U.S. homeowners who have equity in their properties but are also grappling with income loss or job insecurity due to the coronavirus pandemic. And here's some good news: Among property owners with a mortgage, home equity rose 6.6% annually in the second quarter of 2020, according to CoreLogic.

All told, U.S. homes gained $620 billion in equity, or $9,800 per home. And that means homeowners may have an easier time borrowing against their properties during these difficult times.

What exactly is home equity?

You might hear the term "home equity" used in the context of a mortgage application or loan, but what does it really mean? In a sense, home equity is the amount of your home you own outright. Or, to put it another way, it's the market value of your home minus your outstanding mortgage balance. If your home is worth $300,000 today, and you owe $200,000 on your mortgage, you have $100,000 worth of equity, or 33% equity.

Here's why that's helpful. Once you build equity, you can borrow against it via a home equity loan or home equity line of credit (HELOC). The upside of borrowing against your home is that it's easy to qualify, since your property is loan collateral. That means you can snag a home equity loan or HELOC even if your credit score isn't super. Furthermore, with a home equity loan or HELOC, you'll generally snag a lower interest rate on the sum you borrow than you would with another type of loan, like a personal loan.

In case you're not familiar with the difference between a home equity loan and HELOC, with the first, you borrow a lump sum and pay it off in equal installments over time. With the second, you get access to a line of credit you can draw from within a specified time frame. You don't have to withdraw your entire HELOC sum at once. Rather, you get the flexibility to borrow only what you need, when you need it.

Earlier in the pandemic, some lenders limited how many HELOC applications they'd accept. At this point, however, HELOCs are a little easier to get. And since home equity has climbed across the board, it means more homeowners may get to borrow affordably in the coming months, as the pandemic rages on and people's income and jobs get cut.

Why is home equity up?

Home equity is a function of home values, which have soared due to low supply and high buyer demand. A lot of people are itching to buy homes now that mortgage rates are at record lows, and that demand is allowing sellers to raise asking prices. Of course, that's not a great thing for buyers, but for sellers and existing homeowners, it's terrific.

How to figure out how much equity you have in your home

If you have no idea where you stand on the home equity front, take a look at your most recent mortgage statement to see what your remaining balance is. Then, use sites like Zillow to get an estimate of what your home might sell for, or consult a real estate agent who knows the local market well. Subtract your remaining balance from your potential sale price, and that's a snapshot of your equity.

You may not need to tap your home equity anytime soon. But knowing how much you have to work with is good information to have, just in case.

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