What is Home Equity?

Sherry Holetzky

Home equity is the amount of money you have already paid against the value of your home. A simple formula for determining your home equity is to subtract the amount of the mortgage balance from the current fair market value of your home. In other words, your equity increases as your mortgage balance decreases. If your home has been appraised for $200,000.00 and you owe $125,000.00 on your mortgage, your equity is $75,000.00.

There are several factors that determine the equity value of one's home.
There are several factors that determine the equity value of one's home.

Actually, there is a bit more to it. For example, consider the fact that many homeowners have liens or second mortgages on their homes. These amounts must also be subtracted from the appraised value to determine the equity accurately.

Many people put their established equity to work for them. They borrow against it and use the money for improvements to the home, for college tuition for their children, or for things like investments in business ventures such as purchasing additional property.

This is typically done through a home equity loan or line of credit. A home equity loan is a secured loan based on the amount of equity you have in your home. You may be able to borrow almost the full amount of your equity, but remember your home is the collateral for such a loan. This type of financing should be considered carefully, and the homeowner must read all the fine print and discuss all fees before securing such a loan.

A home equity line of credit is usually about 75% of the appraised value of the home minus the balance due on the current mortgage as well as any other liens. This type of credit can be used at any time for any purpose, but there are several fees associated with it. Choose a lender that offers competitive rates and does not eat up a large chunk of your loan with assorted fees.

It is a good idea to seek financial advice from a professional before securing a home equity loan or line of credit, since you could lose your home if you fail to repay the amount borrowed — including applicable fees and interest — as promised.

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Discussion Comments

anon339574

If a home is paid off, what happens to the equity?

rogerviv

how do you figure out the equity on a paid off home that was a rental property for the past 32 years?

imbbmom3

How long after the purchase can you claim the equity?

anon48642

How long after the purchase can you claim the equity?

anon44175

I purchased my home in 2008. do i have equity in my home?

anon41260

how long after the purchase of my home can i claim the equity in the property?

anon40973

How long after the purchase can you claim the equity in the property and how do you determine if there is really equity in your home at the Fair Market Value.

anon39306

How long after the purchase can you claim the equity in the property?

anon38931

very well explained. thank you!

mommadee

if the home is paid for, is there any equity?

anon30289

If I refinance do I lose the current equity in my home?

knowledge

if the home is paid for, is there any equity ?

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