Home Ownership

Be the Master Builder of Your Home Equity

Home equity can be a confusing topic—what is it? How do you build it? How does it help you? It's not the simplest concept to understand. But when it comes to your finances, home equity is very beneficial. For many homeowners, it's typically their most valuable asset. Home equity builds wealth to be used to pay for major expenses, like college, debt or a vehicle, and for later in life. To become an expert, you need know the building blocks:

What is a home equity loan? A home equity loan, commonly referred to as a second mortgage, can be taken out as a second lien against a home in addition to the primary mortgage. A home equity loan pays out in a lump sum upon closing. So it's particularly good for big expenses you need to pay off more quickly. Then to pay it back, each month you'd pay your primary mortgage payment, plus the additional payment for the second mortgage. Home equity loans usually have a lower, fixed interest rate than personal loans because your home is being used as collateral.

How to I calculate my home equity and what does LTV have to do with it? To calculate your available home equity, subtract the amount you owe on your home from its estimated current value. So, if your home is valued at $200,000 and you owe $150,000, your home equity is $50,000. Next, estimate your loan-to-value (LTV)—which is the ratio of what you owe compared to your home's current value. To get this number, subtract the equity in your home from its total value. Then, divide that number by your home's total value. In the above example, you would divide $150,000 by $200,000 to get an LTV of 75 percent, or 25 percent home equity. (LTV only includes a primary mortgage in its calculation.)

How do I build my home equity? A couple ways to increase your home equity would be to pay more than your minimum loan payment each month, live in a neighborhood with increasing home values, go with a shorter term loan. You can also perform upgrades to your home to increase its value. For instance, redoing an outdated kitchen, or replacing your roof or adding a garage door—all improvements that will build value right into your home. A good place to explore your home equity options is with Discover Home Equity Loans, which offers loans from $35,000 to $200,000, with flexible terms and zero fees.

To better understand the possibilities with your home equity, check out our infographic "Be the Master Builder of Your Home Equity" [LINK]. It also includes home improvement projects that will give you a good return on your investment as well as quick suggestions to increase your home equity.

Learning the fundamentals around increasing your home equity will put you in a good position to pursue your financial goals.


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