The need to understand Home Equity
Home equity is the difference between the market value of your home and the amount owed on your mortgage.
Home equity is the value of your ownership share in a home that you own. In layman’s words, it’s the difference between the value of your property and the amount of debt you still owe on your mortgage.
There are two strategies to increase your home equity:
Making mortgage payments
Increasing the value of your home
Your equity grows with each mortgage payment you make. If real estate values in your neighborhood rise, so will your home equity. On the other hand, your home equity may drop. This occurs when property prices decline or when you refinance your mortgage to borrow additional money.
How to Determine Your Home Equity
It is simple to calculate your home equity. Assume you bought a $650,000 property with a 20% down payment of $130,000. That implies your current mortgage balance is $520,000. You would calculate your home equity using the following information.
$650,000 (home value) minus $520,000 (current mortgage) equals $130,000. (home equity)
Assume that real estate values rise continuously over the following five years, and your home is now worth $50,000 more. During that period, you also paid down your mortgage by $50,000. That implies your outstanding mortgage is now $470,000, and your house is worth $700,000. The same formula would be used to compute your current home equity, but with updated numbers.
$700,000 (property value) minus $470,000 (current mortgage) equals $230,000 (home equity)
Many people believe that home equity just refers to the amount you’ve paid off your mortgage, but it also includes any gains in property value. During hot property markets, your equity may quickly expand.
