Home Equity

Home equity refers to the amount of your home’s value you own based on its current market value, less any liens. Most people consider it their most significant financial asset because it contributes significantly to their net worth. Increasing home equity helps you become financially stable. It may also become your lifeline in emergencies since you can borrow from your home equity.

Several factors affect home equity, such as your down payment and your mortgage. Changes in the market may also affect it. If your home’s value increases because of a market boom, so does your home equity.

Before diving into home equity, let's talk about equity first.

In its simplest definition, equity is the value of owning something. Now, let's apply that logic to your home. Home equity refers to the portion of your home's value that belongs to you. Unfortunately, you don't have total equity unless you bought it outright.

As of the second quarter of 2022, the average selling price of homes was $525,000. Most people afforded home prices by purchasing their homes through a mortgage. The bigger the principal on your mortgage, the lower your home equity is. Taking out a second mortgage, which makes your home collateral for your loan, also decreases home equity.

Making payments on your mortgage increases your home equity. You reach 100% equity when you've paid your loan. When your home's value appreciates, so does your equity.

Understanding home equity allows you to make the most of its benefits. For example, the higher your equity, the more proceeds you get to keep if and when you decide to sell your home. You can also loan against your home equity and use the funds for various purposes, including making home renovations, making investments or consolidating existing debts.

However, taking out a home equity loan — also known as a second mortgage — comes with risks. Remember, it puts your house as collateral. Your lender can foreclose your home if you fail to make payments.

A loan-to-value rate of 50% or lower translates to “equity rich,” and it's something most people hope to achieve. Homeowners are usually encouraged to build home equity because you turn debt into assets.

Good equity makes you financially healthy and can be a possible source of funds during emergencies. Another benefit of building home equity is that it helps you avoid negative equity, where your home's value is so low that selling it won't cover what you owe.

Fortunately, you can apply multiple strategies to increase your home's equity. MoneyGeek's guide explores these further.

You would think that most people know how much home equity they have. As it turns out, many homeowners don't.

Fortunately, calculating home equity is straightforward. Take a look at the formula below.

When you lessen your mortgage balance from your home's current market value, the difference is your home equity. Let's say you purchased your home for $300,000 but owe $230,000 on your mortgage. Your home equity is $70,000.

However, remember that your home's value fluctuates over time. Let's say you appraise your home and find its market value is now $350,000. It means your equity increased to $120,000, even if your mortgage balance is still the same.

Not everyone is familiar with home equity — even homeowners may not know how it works and how much they have. These commonly asked questions will help you understand more about home equity.

Purchasing a home is an excellent investment but also entails a lot of responsibility. You must understand home equity. These online references can give you the necessary information.

• 10 Hidden Costs of Buying and Owning a Home: Along with a home’s selling price, you must also prepare for other homeowning expenses. MoneyGeek’s guide details these for you.
• 6 Ways to Finance a Home Renovation: Making improvements to your home is another way to increase home equity. Find out where you can get funds for your projects.
• Home Equity Lines of Credit: How to Apply & Use: Another option for homeowners with equity is a home equity line of credit (HELOC). See if this is a better alternative to a home equity loan.
• Complete Guide to Mortgages: Find all the information you need, whether you’re a first-time homebuyer or refinancing your mortgage.
• Mortgage Calculator: Knowing how much you need to pay toward your mortgage each month is vital. MoneyGeek’s mortgage calculator is a helpful tool for managing your finances better.