A Beginner’s Guide to Home Equity

Home equity is important when considering any kind of mortgage, including a reverse mortgage. The term actually doesn’t mean exactly how much of the mortgage you’ve paid off not including interest payments, as most would think. It means the current market value of the house less any remaining amount on your current mortgage. It is also referred to as “real property value”. 

How Can I Get More Home Equity?

You gain more equity in your home:

  • By paying down your mortgage
  • When your home value goes up due to market conditions
  • When you make improvements to your property that increase your home’s value

Some property improvements may not actually be worth more in terms of the value of your home than what you pay for them, so it is wise not to make a large number of improvements with an eye to increasing home value. To find out what improvements would benefit you the most on the home equity front, consult a real estate professional such as a Realtor.

What is Home Equity Used For?

Home equity, for our purposes, is used to calculate the amount you would qualify for on a reverse mortgage, which you can take out for up to 50% of your home’s value. It can also be used for refinancing on your current mortgage and a home equity line of credit (HELOC). We’ve covered when you want to look at different home equity credit options; basically if you are looking to use any amount over $10,000, a reverse mortgage will make more sense for you than a HELOC.

Do I Have Home Equity After a Reverse Mortgage?

Since you are only allowed to borrow up to 50% of your home’s value, yes. How much home equity you leave yourself with is completely up to you. If you borrow 30% of your home’s value, the remaining 70% is yours when the home is sold and the reverse mortgage is due. We will help you determine the amount that makes sense for you to borrow and you can also ask a financial planning professional to help you map out a plan for your home equity. This is part of the reason for the 50% limit; it protects your legacy when the time comes to sell the house and pay off the reverse mortgage.

Do I Have to Make Payments During the Term of the Reverse Mortgage?

You are not required to make any payments until you sell your home. You can arrange to make interest payments if you prefer to do so in order to reduce the amount payable when the home is sold. Interest payments on reverse mortgages are tax-deductible from investment income, so this may be an option that higher-income seniors may want to look at with their financial planners to give tax returns a slight bump.

You can contact Horizon Equity if you’ve got any questions about reverse mortgages. We’ve been helping Canadians access their home equity for years and have all the answers for commonly asked questions.