Home Equity |
| Credit: Western City Magazine |
What is Home Equity?
Home equity is the value of a homeowner's interest in their home. In other words, it is the real property's current market value. The amount of equity in a house or its value-fluctuates over time as more payments are made on the mortgage and market forces impact the current value of the property.
How does it work?
• If a portion-or all-of a home, is purchased via a mortgage loan, the lending institution has an interest in the home until the loan obligation has been met. Home equity is the portion of a home's current value that the owner actually possesses at any given time.
• Equity in a house is initially acquired with the down payment you make during the initial purchase of the property. After that, more equity is achieved through your mortgage payments, since a contracted portion of that payment will be assigned to bring down the outstanding principal you still owe on the loan.
Example
• If a homeowner purchases a home for $100,000 with a 20% down payment (covering the remaining $80,000 with a mortgage), the owner has equity of $20,000 in the house. If the market value of the house remains constant over the next two years, and $5,000 of mortgage payments are applied to the principal, the owner would possess $25,000 in home equity at the end of the two year period.
• If the market value of the home had increased by $100,000 over those two years, and that same $5,000 from mortgage payments were applied to the principal, the owner would then have a home equity of $125,000.
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