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Home Equity: How Does it Work?

  • Published On 08-Dec-2022
Home Equity: How Does it Work?

Home Equity: How Does it Work?

Equities in a home are the financial interests held by the owner. Essentially, it is the current market value of a property less any attached liens. As more mortgage payments are made and market forces affect the property's current value, equity in a house fluctuates.

A mortgage loan being paid off is not the only way home equity can be represented. To meet financial needs, such as repaying debts or paying for college tuition, homeowners can borrow against their home equity.

Since the funds are secured by equity, home equity-based loans typically have lower interest rates than credit cards and personal loans. As a result, equity in your home can give you access to a variety of funds.

How Home Equity Works:

The lending institution has a legal interest in a home if a portion or all of it was purchased with a mortgage loan. Owners of homes possess equity, which is the portion of their current value that they own.

A house's equity is initially acquired through the down payment made when you purchase it. In the following years, homeowner's equity grows as mortgage payments are made. Each payment reduces the amount owed to the principal since a specific portion is assigned to it.

Equity also grows with the appreciation of your home’s value.

How to Calculate Home Equity:

In real estate, equity is the difference between a house's value and the amount owed on its mortgage. Find out what homes like yours have recently sold for in your neighborhood before calculating your home equity. This will give you the net worth of your house. After determining the net worth of your home and the loan amount you took, you can determine your equity through the following formula.

Home equity = Net worth - the loan amount

How to Increase Your Home Equity:

  • Try to pay more than the minimum amount due for each mortgage payment.
  • Stay in your home for as long as possible to benefit from any increase in its value. Staying in your home can add to its equity value.
  • Think about improving your home in a way that adds value. As not all renovations and improvements can add to your home value, you must do research before taking any of such steps.
  • Invest in a down payment as large as possible when you buy a home to gain equity instantly.
  • Make sure you know what type of mortgage you're getting. In order to build equity consistently, it is advisable to avoid interest-only loans.