What Is Home Equity?
Equity is the value of the unencumbered interest you have in your property. The value of your interest in the property is determined by comparing the market value of the property with the amount owed on the property. For example, if the current market value of your home is $700,000, the balance you owe on your mortgage is $200,000, and you have no additional liens on the property, then the equity you have in your home is $500,000.
The equity you have in your home changes as the value of your home changes, which can be affected by how well you maintain your home, whether or not you update and improve your home, and fluctuations in the real estate market.
You gain equity in your home when you make a down payment, pay down the principle of your mortgage, complete home improvement projects that add value to your home or when the market value of your home increases.
You lose equity in your home when you take out a second mortgage, use a home equity line of credit, have a lien placed on your home, do not maintain your home in a way that retains your home’s value or when the market value of your home decreases.
While the purchase price of your home reflects what your home was worth at the time of purchase, it has little to do with the current value of your home. This means that whether you paid $300,000 or $2,000,000 when you purchased your home, the current value of your home may be a very different number.
Why Does Home Equity Matter?
For most homeowners, the equity they hold in their primary residence is a significant portion of their overall wealth. For many, it makes up the largest portion of their net worth, which indicates just how important equity can be. This also shows that increasing the equity you have in your home is a way to increase your net worth.
The equity you have in your home is an integral part of determining your potential profit if you choose to put it on the market, which, in turn, is essential in determining how much you can afford to spend on your next home.
You can also use a percentage of your equity as collateral in order to obtain a home equity loan (commonly referred to as a second mortgage) or a home equity line of credit. This means that, while equity is not a liquid asset, it can be used as collateral to help you obtain necessary funding to cover medical bills, pay college tuition, pay down higher-interest debts or fund your retirement. You can also borrow against your equity to pay for home improvements that may increase the value of your home.
If you would like to learn more about what your home is currently worth and the potential sale price of your home in today’s market, contact Nora Davis.
AimeeJo Davis-Varela is a freelance writer specializing in real estate, sustainable home improvement, eco-friendly landscaping, green living and travel writing. She is also the owner of Mind Your Manors, which provides second home management services.
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