What is Home Equity?
Home equity is based on the fact that even if your home is in your name, you don’t really own 100% of it if you have borrowed money to buy it and are still repaying the mortgage. Home equity is the portion of your home that you truly own.
Can you give me an example?
Your home equity is the current market value of your home, minus what you owe to your lender.
Let’s say your home’s market value is $100,000, and $40,000 of the mortgage amount is still outstanding. In this case, your home equity is $60,000 or 60%.
How does home equity increase?
Your home equity increases when the value of your home increases, and when you repay a part of the mortgage.
In our example, if the value of your home increases to $120,000 and $40,000 of the mortgage amount is still outstanding, your home equity is $80,000 or 67%.
Alternatively, if the value of your home is $100,000 and you repay some of your mortgage so that $30,000 of mortgage is still outstanding, your home equity is $70,000 or 70%.
Can my home equity go down?
Yes, if the value of your home goes down, or if you take out an additional mortgage on your home, your home equity goes down.
Can the home equity be negative?
Yes, unfortunately home equity can be negative if the value of your home falls dramatically after you purchase it. In such cases, the mortgage amount owed by you is more than the value of the home, and such a mortgage is called ‘upside down’ or ‘underwater’ mortgage.
Many borrowers in the US were in this situation after the financial crisis of 2008.
Why is home equity important?
Your home equity is your asset, and is a part of your net worth. So a higher home equity means a higher net worth!
Home equity is not a liquid asset, but you can utilize it to take out a relatively low-interest loan, called a home equity loan. But that’s a topic for another time…