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What does having ‘equity’ in a home mean?

May 15th, 2024

Equity in a home represents the difference between the property’s market value and the outstanding balance of any loans or mortgages secured by the property.

In simpler terms, it’s the portion of the home that you truly own.

Here’s how it works:

  • Market Value: This is the current worth of your home in the real estate market. It’s determined by factors such as location, size, condition, and local market trends.
  • Outstanding Loan Balance: This refers to the remaining amount of any mortgages or loans secured by your home that you still owe to the lender.

Framed as a math equation: Equity = Market Value of Home – the Outstanding Loan Balance

For example, if your home is valued at $300,000 and you still owe $200,000 on your mortgage, your equity would be $100,000 ($300,000 – $200,000 = $100,000).

To determine your borrowing capacity, take your home’s current value and multiply it by 80% or 100%. Next, subtract the remaining balance on your current mortgage. The resulting figure represents your available equity.

For instance, if your home is valued at $300,000, 80 percent of this would be $240,000. Then, deduct your existing mortgage balance, say $200,000, from $240,000. The means you could potentially borrow up to $40,000 with an 80 percent equity threshold. In this same scenario but with a 100 percent equity threshold, you could borrow up to $100,000 ($300,000 – $200,000 = $100,000).

How the equity in your home can increase – or decrease

Equity can increase in several ways:

  • Paying down the principal balance of your mortgage over time
  • Appreciation: If the value of your home increases due to market conditions
  • Renovations or home improvements that increase the property’s value

Conversely, equity can decrease if the value of your home decreases.

Equity is an important financial asset

It can be leveraged for various purposes, such as obtaining a home equity loan or line of credit. It can also serve as a source of wealth and financial stability for homeowners over time.

Home equity loans can be useful for large expenses such as home renovations and repairs, debt consolidation, education expenses, medical bills, etc. The possibilities are endless. If you have a specific need and a plan for using the funds responsibly, a home equity loan could be beneficial.

Home equity loan interest rates are typically lower than other types of loans, such as personal loans or credit cards, because they are secured by your home.