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Leveraging your property equity is an excellent way to boost savings and grow your investments. Among the many uses of property equity, here are three key aspects every borrower should be aware of. But before getting into its uses, let us understand what it is.
What is Property Equity?
Property equity is nothing but the difference between a property’s value and how much a borrower owes the lender for it. Here’s an example for a better understanding. Let’s say for a property with a value of $500,000; the borrower owes the lender $400,000. In this case, then the property equity is $100,000. So why is this important? Your increased property equity is an asset that you can leverage for the fulfilment of other property goals. Let’s take a look at what your property equity can do for you.
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1. Negotiate a better rate.
There is an inverse relationship between your property equity and the interest you pay. As property value appreciates, your property equity increases and your risk as a borrower declines. This, in turn, puts you in a position to negotiate a better rate with your lender. The best practice on this front is to compare your home loan’s current interest rate against the rate your lender charges new customers for the same level of equity you have. Aim at reassessing your loan every year or at very the least – once in two years. You would be amazed at the savings you could enjoy from even a minor dip in your interest rate. If you find it challenging to calculate your property equity against your property’s current value, engage a mortgage broker who can do the groundwork for you. Since lenders pay mortgage brokers upon a loan settlement, brokers usually don’t charge borrowers for their services.
2. Use it in place of a deposit to purchase another property.
Did you know that you can use your property in place of a deposit to acquire another property? Using your existing equity as collateral, you could either pay no deposit or reduce the amount of deposit you need to purchase the property. The only disadvantage to this method is that your lender could potentially take control of your equity if you are unable to make loan repayments. However, such situations are rare, and many investors have been using their property equity effectively to expand their portfolio.
3. Access loans for other needs
Equity also allows you to easily access loans for your home’s renovation or other personal requirements like travel or education. Here again, your lender uses your existing equity as collateral for the loan they extend to you.
The most straightforward approach to making the most of your property equity is to rely on professional guidance. A mortgage broker can work with you to identify your financial goals, scope the market and handle all the paperwork should you apply for a loan.
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