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By : Jennifer Porter

What Is Instant Equity & How Can I Use It for My New Home?

To understand instant equity and the many benefits that come with it, we have to go back to the start of the home building process when you first apply for a new construction loan.

With a new construction loan, the amount of money you can apply for depends on:

  • Your income and ability to pay off the loan

  • Credit score

  • Amount you put down for a down payment

After you close on your construction loan, you can begin to build your new house.

Oftentimes, added home features like a large covered back patio with an outdoor kitchen or swimming pool have to be put aside to afford the cost of building the home, but that doesn’t mean you can’t still add those home features later, especially if you close on your new home with instant equity.


What Is Instant Equity?

Equity is the difference in what a home is worth versus what you owe on it. Instant equity is that immediate difference that often, but not always, occurs when building a new home.

Say you spend $90,000 on land and $450,000 for the total cost to build, giving you a total loan of $540,000, and the home immediately appraises for $650,000 based on the neighborhood and recent sale values of surrounding homes. You would immediately close on your home with $110,000 in instant equity.


How Can I Earn Instant Equity on My New Home with Hedgefield Homes?

Our customers can manage their own site work if they’d like, with some guidance from us, which will save you from paying builder markup fees (generally around 25%). This means that all of the site work is the customer’s responsibility. We will assist with pricing, scope of work and trade references. This process allows customers to save thousands on site work while accessing our list of reliable contractors.

To make it easier on our customers to manage the site work and earn instant equity on their new home, our Starts Coordinator and Builder will tell the customer when to schedule items, such as well, septic, road or grading. They will even talk to the contractors directly to confirm details, if needed.


How Can I Use Instant Equity on My New Home?

When you earn instant equity, or equity over time, you may qualify for a HELOC (Home Equity Line of Credit) or Home Equity Loan.

This allows you to access the equity of your home and use it to pay for other things, like an outdoor kitchen or swimming pool or other features you weren’t able to add initially.

Going back to the home example listed above, you would be able to access the $110,000 in instant equity you earned by opening a line of credit or applying for a home equity loan with your bank. You would then make monthly payments on this amount to pay on the interest of the loan, which is generally pretty low.


What’s the Difference Between a Home Equity Line of Credit (HELOC) and a Second Mortgage?

According to the Texas Legislative Council Research Division, there are a few key differences between a Home Equity Line of Credit (HELOC) and a Second Mortgage Home Equity Loan, outlined below:

Home Equity Line of Credit

  • Funds available as needed.

  • Maximum line of credit is 80% of market value of home, minus any loans secured by the home.

  • Each advance must be at least $4,000.

  • The interest rate may be a variable or fixed rate - usually variable.

  • Interest is charged only on the balance and begins when money is withdrawn.

  • Payments are made monthly.

  • Interest may be tax deductible.

  • Money may be used for any type of expense.


Second Mortgage Home Equity Loan

  • Funds disbursed in one lump sum.

  • Maximum line of credit is 80% of market value of home, minus any loans secured by the home.

  • The minimum loan amount is usually $5,000 and is set by the lender.

  • The interest rate may be a variable or fixed rate - usually fixed.

  • Interest is charged on the full loan amount and begins on the date of closing.

  • Payments are made monthly.

  • Interest may be tax deductible.

  • Money may be used for any type of expense.

Source: https://tlc.texas.gov/docs/policy/homeequity.pdf 


Can You Get Equity Out of an Existing Home?

You can certainly get equity out of an existing home, especially with the increase in the Texas housing market, but you probably won’t get instant equity out of that home. It grows over time.

For existing homes, you usually come in and pay full market value or above market value for that home so there isn’t any equity to be had. For new construction homes, you are building your house on a set budget and will have the home appraised either prior to building or after the home is complete. This appraisal value often comes in higher than what you spent to build the home.


How Can I Increase the Amount of Equity I Have in My Home?

If you have a home already and are curious how much equity you have, you can ask the bank for an appraisal of your home.

To improve the appraisal value, there are a few ways you can increase the amount of equity you have in your home:


Can I Use Home Equity Out of My Existing Home to Pay for New Construction?

If you have owned your home for a while, you can ask for an appraisal of your home from the bank and you may qualify for a home equity line of credit that you can use toward a new home.

The benefit of this would be if you are limited on available cash, you could use the equity of your current home to build your new one. You would then be able to pay off the HELOC by the time your new home is complete when you sell your previous home.


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