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…
Podcast: What is Home Equity
Fun, informative and concise episodes by a 10-year old, breaking down complex financial concepts in a way that kids and beginners can understand. Episodes cover personal finance topics like saving, investing, banking, credit cards, insurance, real estate, mortgage, retirement planning, 401k, stocks, bonds, income tax, and more, and are in the form of a conversation between a cowboy (a finance novice) and his friend, a stock broker. Making finance your friend, only at Easy Peasy Finance.
A little bit about me: I have been fascinated with the world of personal finance since I was 6! I love to read personal finance books, and keep myself updated on the latest by reading various personal finance magazines. My friends often ask me questions about finance because they find it complex and intimidating. That’s what inspired me to start my YouTube channel called Easy Peasy Finance when I was 8, and this podcast 2 years later.
Everything you need to know about Home Equity Line of Credit or HELOC: What is Home Equity Line of Credit or HELOC, How does Home Equity Line of Credit work, Is the interest rate for Home Equity Line of Credit fixed or adjustable / floating, Can you borrow again after you repay your Home Equity Line of Credit / HELOC, What are the benefits of a HELOC, Are there any disadvantages of Home Equity Line of Credit, and more.
Show notes and transcript at: https://www.easypeasyfinance.com/what-is-home-equity-line-of-credit-or-heloc/