What Is Home Equity? ...
How Home Equity Works
You may never need the answer to: "What is home equity?" if you intend to rent a house or an apartment your entire life. But then again, you may find yourself owning a piece of property and wondering what your equity is and how it affects your home.
From the moment a home owner signs the mortgage papers, equity kicks in. Over the course of the ownership, and as you continue paying off the mortgage, hopefully equity builds.
When it comes time to sell your home and purchase another, equity is what you count on.
What is home equity?
It's the monetary difference between what is owed on the home and what the home is worth. In other words, your equity increases as your mortgage balance decreases. It can vary according to the condition of the property and how much work you have put into improving the home. Sometimes equity can go up with no effort on your part. If the neighborhood prices begin to soar, your equity can climb as well.
Traditionally, to get equity you have to purchase your home and start making payments. After making payments, the difference between what your homes is worth and what you have remaining on your mortgage is the equity.
Equity can also be built by purchasing a home below its assessed or market value. The lower you buy a home below its market value, the more equity you have.
How home equity loans work.
You have a house that is worth more than you owe. It is not like having a checking account that has more money in it than you have bills to pay. To access the equity, you have to take out another loan. This loan is often called a second mortgage, a Home Equity Loan (HEL for short) or a home equity line of credit (HELOC), and does require repayment. You should be aware you are using your home as the secured asset to guarantee repayment of the loan. You still have to have good credit.
How long should I wait before using my home equity?
Wait as long as possible before using that equity. You do not want to use it unless you absolutely must, because it means another payment you have to make. Yes, the equity is yours but you should only use it in case of emergencies or to pay off other bills that may be draining your finances. Many people will consolidate all their debts such as credit cards, college tuitions, or medical bills with a second mortgage.
Use the Home Equity Loan Calculator to help you estimate how much of a home equity line of credit or refinance home loan you are eligible to borrow.
I bought a house for much lower than its appraisal. Is that a good thing?
Buying a home at a lower price than its appraised value is a great thing! It means you have instant equity the moment you sign the mortgage papers or accept the deed. Mortgage companies love when you can find a home that is being sold at less than the appraisal because it means that if you fail to make your payments and they repossess, they can sell the home at a profit.
The credit crunch has made many ask questions about house values today.
More About ...
Ask yourself this question: "Will this matter a year from now?"
~ Richard Carlson Ph.D.
The decision to rent or buy your home depends on a lot of factors, including how settled you are in your job, your marital status, and the geographic area where you live.
Home ownership takes time, money, and sometimes a lot of work. Keeep in mind, if you are married, both you and your spouse are liable for the amount owed on the mortgage.
Learn about the different kinds of mortgages in order to establish the best mortgage for you.
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