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Equity interest is the percentage of ownership in a property. When referring to equity interest in a home, it is the portion of the home value that the owner has vested in the home. The equity in the home is its value or market value, minus any mortgage balance that the homeowner has outstanding on the property.
Equity typically becomes a relevant factor in a couple of situations. One of the primary situations is when the homeowner wants to take money out of the home. In order to take the money or equity interest they have out of the home, homeowners can establish an equity line of credit, an equity loan or do a cash out refinance of the first mortgage. Generally, lenders will not loan the homeowner 100 percent of the equity interest, but rather a percentage of the home's equity.
Another primary situation when equity interest becomes a factor is when the homeowner wants to sell the home. The equity interest affects the amount of a profit the seller will walk away with at the end of the sales transaction.
For example, a home is selling for $200,000 US Dollars (USD). The home seller has a current mortgage balance of $150,000 USD. Technically, the equity in the home is $50,000 USD, which is the sales price of the home minus the outstanding mortgage balance. If the home seller has to pay real estate agent commissions or other fees then this will reduce the seller's equity interest or profit amount.
There are several ways that the equity in a home can increase or decrease. One of the ways that equity in a home increases is when the market value of the property rises. Another way to increase the equity interest in a property is to pay down the principal balance of the mortgage(s) on the home.
One of the ways to decrease the equity in a property is when the market value of the home decreases. The equity can also decrease if the homeowner encumbers the property with additional liens, lines of credit or mortgages on the property. A high mortgage on a property translates to less equity interest for the homeowner.