What Exactly is Home Equity?

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Real Estate

I'm sure you've heard people talk about home equity, but do you know exactly what it is, and, more importantly, how you earn it when you own a home? 

Home equity is the portion of your property that you truly "own." It can increase over time if your property value increases.  There are a few different ways this can happen:

1. The market changes and your home appraises for more than you bought it for.
2. The mortgage loan balance is paid down.
3. Home improvements.

The easiest way to understand equity is to start with a home's value and subtract the amount owed on any mortgages - purchase loans used to buy the house, and/or second mortgages that were taken out later. For example, if you purchased a home for $200,000 with a 20% down payment, your loan covered the remaining $160,000. In this example, your home equity interest is 20% of the property's value. Now, assume your home's value doubles to $400,000, and you still only owe $160,000. You now have 60% equity!

Here are some tips for increasing your home's equity:

Buying your house with equity in it: You buy the house for less than the appraised value. This indicates that you go into the house with some equity already. 

Loan repayment: As you pay down your loan balance, your equity increases. Most home loans are standard amortizing loans, with equal monthly payments that go toward both your interest and principal. Over time, the amount that goes toward principal increases, so you build equity at an increasing rate each year.

Price appreciation: You can also build equity when your home gains value, either because of improvement projects or a healthy real estate market.

Equity is part of your total net worth. If you move, you can sell your current home and put that money toward the purchase of your next home. You can also borrow against your equity. You can get cash and use it for just about anything with a home equity loan. 

If you're interested in finding out how much equity you have in your home, call me at 225-229-0451 for a complimentary market analysis.