If you’re a current or future homeowner, you’ve most likely heard the term “home equity” being thrown around. So, what is it? Essentially, home equity is the amount that differentiates the home’s value and how much the borrower owes. When a borrower pays down the mortgage debt, he or she is also contributing to the home equity. As an example, if a home is valued at $200,000 and a homeowner still has $100,000 left on the mortgage, that homeowner has 50% equity within the home. Therefore, once the mortgage has been paid in full, the homeowner will also be the rightful owner of all the home’s equity.
One thing to be aware of is that equity doesn’t necessarily equate to the amount of the mortgage that has already been paid. For example, if a homeowner’s home value increases, that homeowner will own the extra equity; the home’s total equity will now be more than the sum of the mortgage payments. If the same homeowner mentioned above had their home value increase to $250,000 but still owed $100,000, that homeowner would own 60% equity in the home ($150,000). If that property value decreased to $150,000, the borrower would only have 33% equity in the home.
Home equity is acquired every time a homeowner makes a monthly mortgage payment. There are several loan programs that exist (reverse mortgage, HELOC, and home equity loan) that allow homeowners to access their equity in exchange for cash. Many people will do this if there are large expenses such as medical bills or tuition payments. It’s not necessarily recommended to extract your home’s equity if you don’t understand equity or are delinquent on your mortgage, but get in contact if you think it could help you cover important costs.