What Does “Equity” Mean In Real Estate?
Equity is the market value of real property, less the amount of any liens that may exist. It could also be explained as the financial interest that a homeowner has in a property.
A more in-depth explanation of home equity can be outlined as the percentage of your home that you own. This is the part of the home that you have an interest in.
You might consider yourself a homeowner — but more than likely, you do not own the property free and clear. For most people, it is not possible to purchase a home without borrowing money to do so. When this happens, the lenders as well as you will have an interest in the property until any and all loans are paid off, when it becomes yours entirely.
Here is an example of what home equity looks like.
Let us pretend that you purchased a home for $200,000. When you made the purchase, you put down 20 percent as your down payment. In order to pay for the rest, you got a loan from a mortgage lender.
This means that from the start of your purchase, you have 20 percent equity in the home’s value.
The formula to see equity is your home’s worth ($200,000) minus your down payment (20 percent of $200,000 which is $40,000). You only own $40,000 of your home.
Another way to think about home equity is to consider how much is owed instead of how much has been paid.
Building equity in your home happens as you repay your mortgage loan. Every time you make your monthly payment, you pay interest plus a small portion of the balance of the loan (the “principal”). As your balance decreases, the equity you have increases. Equity can also increase if your home’s value increases.
What can you do with your home equity? Equity is considered as an asset and is included in the total figure of your personal net worth. Therefore, you can use it for whatever you feel necessary.
Some examples of popular uses for home equity are to purchase a new home, to pay college expenses for your children, to purchase a new car, for vacations or even for your daughter’s dream wedding. This money should be used wisely because it is an important asset to you.
A home equity loan is also known as a second mortgage. Some may think that having this money at your fingertips is a good thing, but you should also be aware that it can be a dangerous thing as well. When you get a home equity loan, your home serves as collateral for the loan. If you fall behind on your payments, it is possible that you could lose your home due to foreclosure.
All homeowners are proud of their homes. You should be very careful and responsible with your home equity. Be sure to ask questions and be sure that you understand exactly what home equity is if you consider leveraging it for a loan or another purpose.
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