What is home equity?
Home equity is the portion of your property's value that you truly own, which is the difference between the market value of your home and the amount you owe on your mortgage. It represents the financial stake you have in your property and can be an important asset that can be leveraged for various purposes.
Key takeaways
- Home equity represents the value you have built up in your home over time.
- It can serve as a valuable asset that can be leveraged for various purposes, such as obtaining loans or improving your financial position.
- However, it's important to use home equity responsibly and consider the potential risks associated with borrowing against your home.
- Regularly monitoring your home equity can help you understand your financial position and make informed decisions about your property.
How is home equity calculated?
To calculate your home equity, subtract the outstanding mortgage balance from the current market value of your home. For example, if your home is valued at $300,000 and you owe $200,000 on your mortgage, your home equity would be $100,000 ($300,000 - $200,000).
Home equity in the real world
Let's say you purchased a house for $250,000 and made a down payment of $50,000. You obtained a mortgage loan for the remaining $200,000. After a few years, the value of your home has appreciated to $300,000, and you have paid down your mortgage balance to $180,000. Your home equity at this point would be $120,000 ($300,000 - $180,000).
How can home equity be used?
Home equity can be utilized in several ways. One common option is to take out a home equity loan or line of credit, where you borrow against the equity in your home. This can be used for home improvements, education expenses, or other financial needs. Another option is to sell your home and use the proceeds to purchase a new property or invest in other ventures.