Read these 7 What is Equity? Tips tips to make your life smarter, better, faster and wiser. Each tip is approved by our Editors and created by expert writers so great we call them Gurus. LifeTips is the place to go when you need to know about Real Estate tips and hundreds of other topics.
You can tap into the equity in your home by getting a home equity loan or 'second mortgage.' Some homeowners will get a home equity line of credit, on which they can write checks to get money as they need it rather than getting a lump sum. Keep in mind that your home secures a home equity loan or line, just as your primary mortgage does. This means that if you can't make the payments, the lender can foreclose on your home. Make sure you can keep up with any payments you agree to. Beware of taking out too much equity, since a downturn in the real estate market could leave you owing more than your home is worth.
The equity in your home increases when the value of your home goes up or the amount you owe goes down. Some people increase their equity by paying off their mortgage faster than required. Others increase their equity by increasing the value of the property. When you make improvements to your house yourself, without taking out a loan to pay for them, it's known as 'sweat equity.' By doing the work yourself, you're increasing the value of your home without incurring large costs. As the value of your home increases, and your mortgage remains stable, your equity goes up.
Lenders have embraced liberal lending practices for folks who desire to borrow from the equity that has accumulated in their home. Equity is determined by taking the home's current market value, subtracting the outstanding mortgage(s) and the remainder is equity. If your home is worth $250,000 and you owe $200,00 - you have $50,000 in equity.
The risk evolves in borrowing the property's full value, or as in some second mortgages, banks are even lending up to 110% of its value. While it may be useful to pull the available cash from the property, you are in a position that will cripple you in the event you find yourself having to sell the home within the near future. Homes cannot be sold for more than their value which causes sellers to have to "bring cash to the closing table" in order to clear the first and second mortgages. In the event of a job loss or transfer, sellers are financially strapped.
When using the equity from your home you must keep in mind that you are spending the resources that could be necessary to purchase a replacement home should you decide to move.
You can borrow against the equity in your home with a home equity loan or line of credit. If you have credit card debt or other high interest debt, it may make sense to take out a home equity loan to pay them off. The interest rate on a home equity loan is often much lower than the interest rate on a credit card, and the interest you pay on a home equity loan may be tax deductible. Just be sure you use the loan to pay off those higher interest bills, and don't rack them up again. And remember, the home equity loan is secured by your house - if you can't make the payments, the bank can take your house.
The equity in your home is the difference between the value of your home and the amount you owe (your mortgage and any home equity loans). Most lenders will loan you up to a certain percentage of the value of your home. For example, many lenders will loan up to 90% of the home's value. Some lenders will loan even more than the home is worth, say, 105% or 110%. Beware of these loans, especially in an uncertain real estate market. If you take one and cannot make the payments, and the bank forecloses, you'll owe more money even after than bank sells your house.
Because equity is based on your home's value and the amount you owe, the amount of equity in your home will vary as those two factors change. So, if the real estate market in your area goes up, raising your home's value, your equity goes up. Conversely, if the market declines, your equity goes down. Each time you make a mortgage payment, part of the payment goes to pay down the principal amount, which raises your equity by that amount. If you take out a home equity loan or 'second mortgage,' your equity is decreased by the amount of the loan.
Equity is defined as the value of your home less any liens (mortgage, home equity loans, etc.). So if your home is worth $500,000 and you have a $300,000 mortgage, your equity is $200,000. Many people borrow against the equity in their homes by taking out a home equity loan or 'second mortgage.' Keep in mind that if the value of your home goes down, the amount of equity you have decreases, which can leave you 'upside down,' or owing more than your home is worth, if the real estate market in your area takes a sudden tumble.