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Home Equity 101: How It Works & Why it Matters

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It’s true what they say: owning a home isn’t always easy. Sure, taking out a mortgage can feel like an overwhelming amount of debt, but determining the value of your home can quickly turn that financial frown upside down. Building equity in your home is one of the many perks of homeownership. Home equity is a factor in your overall financial wealth, and you can leverage it for financial investments to meet your goals. The GarbageDay app isn’t just about reminding you when to take out the trash or what is recyclable. We’re all about making your life as a homeowner a little bit easier to navigate. So let’s dive into understanding what home equity is, how to use it and why it might matter to you. 

What is home equity?

Home equity is the current value of your home minus your outstanding mortgage balance. Thankfully, calculating your home equity is a breeze! Simply calculate the current market value of your home and subtract the mortgage balance. If your home doesn’t have an outstanding mortgage, the home equity would be approximately equal to the total market value of your home. 

Below is an example of how to determine your home equity. This example calculates the difference between the value of your home and how much you owe on your mortgage. 

If your home is worth $250,000 and you owe $150,000 on your mortgage, you have $100,000 in home equity.

Home equity is not solely determined by how much you’ve paid off your mortgage. An increase in the value of your home based on the real estate market may also increase your home equity. On the flip side, your home equity could go down over time if the market value of your home decreases.

Learn more about understanding the value of your home. 

How borrowing on home equity works

Other than being a valuable piece of information on what might be your biggest asset, home equity is commonly used when you need to borrow money. In terms of options, home equity is an asset you can borrow against when applying for a home equity loan (i.e. a second mortgage) or a home equity line of credit (HELOC). Understanding the difference between these two borrowing options is a crucial step in financial decision-making.

Home equity line of credit (HELOC) vs home equity loan

These two concepts may seem similar, but they are two ways of borrowing against your home equity. Make sure to consult your advisor to explore the best option to meet your financial goals.

A home equity line of credit (HELOC) is a type of home equity loan distributed as a revolving line of credit, often with an adjustable interest rate. It is similar to a credit card in that it allows you to continuously borrow up to a maximum limit. It allows you to withdraw funds over the course of your mortgage term instead of receiving the funds as a lump sum. Once you withdraw funds, you will be required to make monthly payments of any interest the loan has accrued.  

A home equity loan allows you to borrow a lump sum against your current home equity and is often referred to as a second mortgage. These loans are offered at a fixed rate over a fixed-year period, but you need to be aware that you could lose your home if you are unable to repay your home equity loan.

Additional things you should know: 

  • Typically, interest rates on loans secured against home equity can be much lower than other types of loans. 
  • You must go through an approval process before borrowing against your home equity. 
  • If you need to access additional funds, using the equity in your home can be a lower-cost way to borrow money than taking out a traditional loan or using a credit card.
  • Not all financial institutions offer home equity financing options. Ask your financial institution which financing options they offer.

Why should you use your home equity?

At this stage, you may be wondering why you would consider using your home equity to borrow money. There are many reasons why homeowners leverage their home equity for additional funds. Below are some common examples:

Connect with a financial advisor to learn more

When it comes to homeownership, understanding how you can unlock borrowing options with home equity is more straightforward than maintaining gutters and downspouts. Start by assessing your finances with a professional to determine if using your home equity to borrow is the right path for you. An RBC advisor can help you understand if you qualify and, if so, unlock your home equity when you’re ready. Book an appointment today and get advice suited to your exact needs.  

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This article offers general information only and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.

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