I often get questions from clients and friends about home equity, what it is, what it means when a home has equity and what to do with it. I figure that it could be beneficial to do an quick over view about equity and how it can benefit you.
Many see the home equity as a homeowner’s most valuable asset. So let’s start with the basics, shall we? According to Investopedia, “Home equity is the value of ownership built up in a home or property that represents the current market value of the house less any remaining mortgage payments. This value is built up over time as the property owner pays off the mortgage and the market value of the property appreciates.” Let’s dive into that. It is an asset that come’s from the homeowners interest in a home. A simple way to calculate equity is to subtract any outstanding loan balance from the market value of said property.
Two ways that equity can go up is 1) if the value of the property increases (which in Southern California is very common) or 2) or if the balance of the loan has been paid. As the loan balance decrease, the equity of the home increases. Basically, the equity is the portion of the property that you actually “own.”
One of the more frequent questions that I hear is, “How do I use home equity?” A very good question indeed. Since your equity is what you own, you can take pieces of that equity out or you can pass it along. Some people use it to go towards a new property once they are trying to sell an old property. You can also take it out as cash but warning, this could be a risky move. I always advise people to use it for home projects or other larger scale projects that can ensure a return. Taking cash out of your equity can be a dangerous move. Definitely one that needs consulting before pulling the trigger.
People also sometimes do home equity loans which can be tempting because they can offer you large sums of money usually with low interest rates. They usually are easy loans to apply and qualify for but be sure to understand how these different types of loans work before you take that jump.
I hope that that gives you a bit of a better understanding of equity and of how home equity works. If you have any questions feel free to respond in the comment section or to email me at firstname.lastname@example.org.