A: Simply put, the equity in a home is the market value, minus the debt owed against it. In other words, if you own a home worth $1 million but have a loan of $750,000, your “equity” is $250,000. As you pay off your loan, your equity increases, but irrespective of how much you’ve actually paid, your equity can also grow as the market appreciates.
Keep in mind that equity can—and does—change over time. Thus the equity on a home can quickly grow in a rising market, or drop precipitously as the market corrects, as it did during the financial crisis of 2008. It’s why many homeowners found themselves “upside down” after the meltdown, owing more to the banks than the current market value supported, and why many (too many) walked away. Had they stayed, they might have reaped the benefits of today’s current marketplace.
Why is “equity” important? In theory, the equity on a house, allows you to move up the scale, trading one home for the next, but it also creates wealth, security, value, and for many, an account on which to borrow against (known as a HELOC) for items such as home improvements, college tuition or other significant expenses. Avoid using the equity in your home to pay for vacations, automobiles and other such luxuries or you may find you’ve actually used up the equity in your home. While lenders might have you believing you should tap the equity as often as you like, in my experience it’s a losing proposition.
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If you treat your “equity” with respect, using it to increase the value of your home, you’re much more likely to build a healthy “next egg” for the years ahead and who doesn’t benefit from that?
Julie Gardner, McGuire Real Estate, (510) 326-0840, julie@juliegardner.com.
A: Home equity is a concept; you can’t physically see or touch it, but it’s there. Equity is the part of your property you don’t owe the bank for, the more you have the more your net worth enhances. Home equity matters because it’s commonly used as a means to pull money from, and it provides security for lenders’ loans.
Imagine grandma owning a home free and clear and the fair market value is $100,000. When she passes away you inherit it. You have just inherited a 100 percent equity home, plus a headache if you have siblings she didn’t include in the trust. Now say before grandma’s passing she funded an around the world cruise by pulling a home equity line of credit for $20,000. Once she passes and you inherit the home your equity is now $80,000. Thank you, grandma.
Want to increase your home equity? Here are three tips: 1. Repay your loan. Pay off your loan balance and your equity increases. 2. Remodel. Like anything looking worse for wear give it an update, start in your kitchen or bathrooms. 3. Hold out on selling. You can build equity just by being in a healthier real estate market.
Zara Rowbotham, Vanguard Properties, (415) 418-8865, zarasrealestate@gmail.com.
A: Home equity means one thing: Power. The power to extract liquid cash from an asset and inject it into another, whether it be a new home, a second home, investment property, or first home for your children.
Equity creates buying power in the form of non-contingent cash offers that push you and your offer to the next level and the front of the line. Pulling equity from your home is how you climb the property ladder and compete in a market where quick closes and cash are king. With interest rates still radically below where they were when you first purchased, now is the time to utilize your homes potential and grow your portfolio.
Marco Carvajal, Vanguard Properties, (415) 699-7484, marcocarvaja@gmail.com.