How to Calculate your Homes Usable Equity
Purchasing a home on equity is a common practice among many first-time property investments. However, the process of determining the amount of equity in your property can leave some people confused. What is equity and how is it calculated? In this article, we’ll answer these questions as we discuss the process of finding the amount of equity in your property. We’ll also look at how you can use this equity to invest in the property market.
Before we can discuss investing your equity, we should first discuss what equity is and how it is calculated. Equity is simply the difference between the value of your home and any debts that you owe. However, you can only use 80% of your homes value when getting a loan for an investment property. To calculate how much equity you can invest you only need to know your current home value and the amount of debt that you owe. For example, imagine you have a house worth $1 million and you have $400,000 still to pay on your mortgage. Your house value would be 80% of $1 million, which is $800,000. To calculate the amount of usable equity you then subtract your house value from the value of your mortgage, in this example $800,000 minus $400,000. Therefore, the usable equity of our example property is $400,000. It should be noted that many banks offer apps to allow you to calculate your usable equity more accurately. Not that we understand how to calculate usable equity, let’s look at how you use this equity to invest in the property market.
Many first-time investors purchase their property using equity in their home. But how does this process work? Many banks are willing to offer you loans that allow you to use equity in your home to invest in the property market. Generally, you can use around four times your usable equity to purchase the property. Going back to our example, we found a usable equity of $400,000. This means that they would be able to purchase a property of around $1.6 million. It should be noted that this has to include all costs such as stamp duty and legal fees. It should also be noted that you might be able access more than 80% of your home value, which can provide you with a higher amount of usable equity. This will provide more risk and usually requires you to get Lenders Mortgage Insurance (LMI) to cover the risk. Additional fees and charges may also be charged by the bank. Finally, banks offer different rates so be sure to shop around to make sure that you find the best deal for you.
Hopefully, this article has explained clearly how to calculate your usable equity. Additionally, it is hoped that the often-confusing process of using this equity to invest in the property market has been explained in simple terms. Now that you understand how the process works you can make a judgement about whether you should use equity to purchase an investment property.