Your Home and Its Equity

Posted on January 4, 2018. Filed under: Uncategorized |

For those that own homes, the term ‘equity’ may come up often when talking about the financial aspects of a home or property. Equity is an important part of home ownership, especially when it comes to its value as an asset to the homeowner. So what exactly is home equity? Do all homes have equity, and what are some things owners can do with the equity in their properties?

What is Home Equity?

Home equity is basically the difference in the home’s fair market value and the outstanding balance of all liens on the property. If your home has a mortgage loan, it’s the amount still owed on the mortgage loan subtracted from the home’s market value. Home equity is an incredibly important asset to a homeowner because it has the ability to grow, and home equity that increases is a good thing for any homeowner.

How Does a Home’s Equity Grow?

Home equity can grow in two ways: through loan repayment or price appreciation. Equity is the difference between what is owed on the property and the property’s market value. When a homeowner pays down a mortgage loan (specifically a standard amortizing loan), the difference in the principal loan balance and the market value positively increases, meaning the home’s equity grows. For those homeowners with an interest-only loan or another non-amortizing loan, equity is not built in the same way and may require additional payments in order to reduce the debt and increase equity.

The other way to build equity is through an increase in the market value of the property. This doesn’t actually require any action on the part of the homeowner: it can be a direct result of any home improvements (which would be done by the homeowner), or is the general nature of a healthy real estate market, meaning a home’s equity can increase if it’s in a prosperous real estate market.

Is Equity Important?

Equity is important in many different areas, especially when it comes to properties. Equity is considered an asset; an asset represents a value of ownership that can be converted into cash. When it comes to real estate, homeowners want positive equity in their properties. Positive equity is when the value of the asset exceeds the value of any liabilities. Equity plays an important part in the overall value of home ownership because a home or property is likely to be one of the biggest assets a person or family will own, and the more positive equity in the property the higher the value of the asset to the homeowner.

Can an Owner Utilize a Home’s Equity?

Because equity is an asset, a homeowner has a number of options when it comes to using their home’s equity. Some homeowners will sell their current home and use the equity they’ve made as a down payment on a different property. This is very common and popular throughout the U.S. Another option to utilize a home’s equity is by taking out a home equity loan or a home equity line of credit (HELOC).

A home equity loan (also known as a second mortgage) borrows against a home’s equity and provides cash to a home owner for whatever they wish to use it on. Some may use this money on improving the home via updates or renovations, while others may use it to fund an education or pay off loans. Some homeowners may even invest the money in a long-term investment. Taking out a home equity loan will result in two loan payments – one for the original mortgage loan and a second for the home equity loan.

A HELOC is essentially a credit line attached to a home’s equity. A homeowner can borrow what they need during the ‘draw period’ and then pay back what is borrowed over a certain amount of time. There is another option called a reverse mortgage, but these types of loans are only available to those over 62 years of age and can be complicated to understand. It’s important to note that any loan taken out against the equity in a home or property does need to be paid back – it’s not free money.

Equity is an important part of home ownership. As an owner, you should understand the equity available in your home and how you can utilize it to your advantage. Your local agent can provide references for home equity experts. Reach out today for more information if you have questions about your home, equity, or your local real estate market.  Contact me at David Chirico, Realtor at (561)723-4600 or david@davidchirico.com

 

 

 

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