Your home equity matters when you are paying private mortgage insurance (PMI). Many conventional mortgages require you to pay for PMI until your home’s equity reaches 20%. Once you reach this figure, it is often possible to remove PMI from your mortgage and save money. If house prices are rising in your community, you may have more home equity than you realize. Check yours if you are paying PMI.
Your home equity matters if you would like to borrow against the value of your equity to finance home improvements, pay for college, or consolidate debts. This is called a cash out refinance. You refinance your loan for more than you owe and take the difference in cash. How much home equity you have affects the amount of money you might be able to borrow.
Finally, your home’s equity matters when you are refinancing your mortgage. That’s because the value of your equity affects your loan-to-value ratio (LTV). Having a significant amount of home equity lowers your LTV. Lenders often prefer customers with lower loan-to-value ratios and may offer them lower rates or better terms on refinancing as a result.