Your home might be your single biggest retirement plan, either as a place to live mortgage-free after the loan is paid off, or as a source of income after selling. While this may be your end game, how can your home work for you in the short or medium term?

Well, it is simple and straightforward. As an excellent source of funds, your home’s equity which is acquired over the years, can be used to finance expenses such as education, debt consolidation, investment and medical expenses.

So, home equity, what is it and how does it work?

Home equity is the market value of your home minus the outstanding mortgage balance. Once you continue to make on-time payments and your home does not depreciate in value, equity will naturally build over time.

…and how do you calculate home equity?

The calculation is simple. Get your home’s estimated current market value from a valuator because what you paid for your home a few years ago or even last year might not be its value today. With this figure, subtract your mortgage balance i.e. subtract the amount you still owe on your mortgage and any other debts secured by your home. The result is your home equity.

….and how do you increase the equity in your home?

Because home equity is the difference between your home’s current market value and your mortgage balance, your equity can increase in several ways:

• By making a large downpayment. The larger the initial payment made toward your home’s total purchase cost means the amount you will need to finance gets lower and the equity you will have in your home from day one increases.
• By making on time mortgage payments. Every month when you make your regular mortgage payment, you are reducing your mortgage balance and increasing your home equity. Also, you can pay a little extra each month, but make sure that the extra is applied to the loan principal.
• By making lump sum payments to your principal balance. If you have extra cash, whether from a bonus, or a gift, paying it towards the principal on your mortgage can help you build equity in your home instantly. This is because every dollar you put towards reducing your mortgage principal reduces the interest you have to pay, since interest is calculated monthly on the reducing balance.
• When you make home improvements/upgrades that increase your property’s value. Upgrading and improving your home can be a smart investment to increase the value of your property. If you do this, you can enjoy the benefits of a more comfortable living space while increasing your home equity. So, while you think of making necessary repairs, adding a bathroom or bedroom, renovating the kitchen, installing new flooring or replacing windows and doors, think about your budget and weigh the proposed increase in your property value against the cost.
• When your property value appreciates because of developments in the surrounding areas. An increase in the market value of your home sometimes happens because a new road is built or a mall opens nearby, making the location of your home more desirable. This then will increase the equity in your home.

If you have determined that you need to tap into your home equity, just know that you can benefit from long repayment terms like that of a first mortgage. At TTMB you can be financed for up to 30 years, depending on your current age and retirement date. Sometimes we can extend the term up to age 70.  This can translate into a very affordable monthly repayment instalment.

Another advantage is the lower interest rates…Because home equity loans are secured by your property, they are offered at a lower rate than unsecured forms of borrowing such as personal loans or credit cards.

 All in all, to ensure you build your home’s equity, you must remember:

• Pay your mortgage on time every month, making sure your debt is reduced consistently, and
• Make sure that your home is well maintained.