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What Is Equity?

May 4, 2021

What Is Equity?

Equity, equity, equity. Everyone always talks about equity. We have all heard that one of the benefits of buying a home is that you can build equity in it and tap into that equity later.

But what exactly is equity, and how can you use it? Our professionals got together to establish a breakdown of the ins and outs of equity.  

Understanding Home Equity

Home equity is the portion of your home that you actually own. Specifically, it is the difference between what you own on your home minus any outstanding mortgage and loan balance. Your home equity, in most cases, is your most valuable asset, as it can be used to borrow home equity loans or lines of credit. It can increase over time if the property value increases or you pay down the mortgage loan balance

How Do You Build Home Equity?

As mentioned above, home equity is the difference between your home’s current value and your remaining mortgage or loan balance. You can increase your home equity in a few ways:

Pay Your Monthly Mortgage

The simplest and easiest way to increase your home’s equity is by reducing the balance on your mortgage. Each month as you pay your mortgage payment, you are paying down your balance and increasing your equity. Want to build your equity faster? You can make additional payments.  

Increase Your Property Value

If your mortgage principal is the same, you can increase your equity by increasing your property value. Often property values rise over time, which is called appreciation and can be a way for you to build your home equity. You can also increase your property value by investing in home renovations.  These renovations can be adding an extra bedroom, renovating that old kitchen, or adding a master bathroom.

Make a Large Down Payment

The fastest way to build equity is to come up with a large down payment at the onset of your loan. The bigger your down payment, the more equity you’ll immediately have in your home.

How Do You Calculate Home Equity?

To calculate the equity in your home, follow these steps.

1. Get Your Home’s Estimated Current Market Value. 

What you paid for your home a few years ago or even last year may not be its value today. You can use online home price estimator tools but consider talking to a local real estate agent to get a more accurate measurement of your home’s market value.

2. Subtract Your Mortgage Balance. 

Once you know the market value of your home, subtract the amount you still owe on your mortgage and any other debts secured by your home. The result is your home equity.

How Do You Use Home Equity?

There are three most common uses of home equity.

1. To Make Selling Your Home Easier. 

When you sell your home, you’ll get most of your equity back to you at closing. Often you can then use that money as a down payment on your next home.

2. Obtain a Home Equity Loan 

A home equity loan is a  second mortgage, paid out in a lump sum and repaid in fixed monthly payments at a fixed interest rate.

3. Home Equity Line of Credit (HELOC)

Similar to a credit card, HELOC is a line of credit with a limit for what you can borrow and a variable interest rate.

Learn Your Home Value With The Mortgage Firm North Central Florida 

If you want to learn more about your home’s value, contact our experienced loan officers. If you are ready to look into the value of your home, contact us today.