The Basics: Home Equity – Let’s Break it Down!
Let’s say you purchased a home for $300,000.
You make a 20 percent down payment of $60,000.
You were approved for a loan of $240,000 to cover the remainder of the mortgage.
You are the property owner and your lender does not own any portion of the property.
However, keep in mind, that even though your lender does not own the property, the lender is still utilizing it as collateral for your loan.
All this means, is that should you not pay your mortgage as your terms outline, a lender can secure its interest by getting a lien on the property.
If a lien is put on your property, this means you are unable to sell your property without resolving the debt with your lender first.
How Can Home Equity Increase?
Loan repayment: By paying down your mortgage loan balance, your equity increases. Especially with standard amortizing loans! Why? Well, this type of loan comes with equal monthly payments in which each month, your payment goes towards the principal AND interest. As more time progresses, the amount that goes towards the principal repayment increases, therefore building equity at an increasing rate each year!
Price appreciation: Now how about this? Your home can gain additional value solely because of improvement projects or a healthy real estate market. What does this mean? Well, you can build equity without exactly even trying!
So WHY is Home Equity an Asset?
Though there is still much more to learn about the different type of home equity loans, the main take away here is that home equity is an asset.
Why? Well, because it is part of an individual’s total net worth!
When you have equity, you can borrow against it for just about anything (though not recommended for paying your current expenses)!
Buying your next home, borrowing against equity, and funding retirement are popular choices homeowners with equity will make, but it is recommended that you as a homeowner are fully aware of your specific agreement with your lender to truly reap the benefits of your home equity!