What is home equity? How can you as a homeowner increase your equity? There are many different ways to build your equity that we will go over today.
What does equity really mean in real estate? Equity is the difference between the market value of your home and what you owe your lender on the mortgage. If you were to sell the house, the equity would be the amount you receive after the mortgage is paid off.
For example, let’s say that the market value of your home is $200,000 and you owe $150,000 on the mortgage. In that case, your equity would be $50,000.
Keep in mind that net equity is different than gross equity. Net equity is the gross equity minus the costs of selling the home. These costs may include the commission for the Realtor, unpaid property taxes, and items in the closing costs that you cover for the buyer.
Now, let’s say your house sells for $200,000 and the mortgage balance on the home is $150,000. Your gross equity is $50,000. You owe a commission of $12,000 to your Realtor and $3,000 in closing costs. As a result, your net equity is $35,000. Net equity is the amount that you pocket at the end of the sale.
So, how is home equity built? Homeowners can build equity in a number of ways, such as making a down payment to reduce the initial mortgage amount. A 20% down payment on a $100,000 home is $20,000. By paying that $20,000, you have reduced your mortgage amount to $80,000.
Of course, mortgage payments increase your equity over time as well. If you make extra payments applied to the principal, that also increases your equity by reducing the amount you owe on the loan.
If you make improvements to your home that increase the market value, you also increase your equity. For example, if you spend $50,000 on a kitchen remodel that raises the market value by $30,000, your home equity will increase by $30,000, assuming that you didn’t take out a home equity loan to do the remodel.
That increase in equity is hypothetical. You will only know the true increase in equity when it comes time to sell.
The market value of your home may rise because similar houses in your area are now selling for more money. Your lender may be willing to refinance your loan according to that higher market value. For example, you bought your $100,000 home with a $20,000 down payment. Over the past two years, similar homes sold for $120,000, increasing your equity by $20,000.
Again, that equity is hypothetical. You must sell your home to realize equity.
If you have any other questions about home equity or about the home selling process, just give us a call or send us an email. We would be happy to help you!