What is equity? Do I have any equity?

Equity, in simple terms, is the amount of money you have tied up in an asset. With regards to property, this is usually the amount you have paid off on a house, plus any increase in the property value since you purchased it.

For example:
I have purchased a home for $400,000, paid $50,000 down payment, and borrowed $350,000 as a mortgage.  I now have $50,000 in EQUITY.  That is, my cash tied up in the asset.

Example continued:
5 years after purchasing this home, the property is now worth $500,000 and my mortgage balance is now just $300,000 (as I have paid the mortgage down bit by bit over the past 5 years with my monthly payments). Now I have $200,000 in equity.  Some of that equity ($100,000) is earned simply because my property has increased in value, even though I didn’t use any cash.  The rest of the equity comes from using my cash to pay down the mortgage and from the down payment ($50,000 plus $50,000)

To calculate your EQUITY, use the following calculation…

“Property Value” less “Mortgage Balance” = “Equity”

Example: $400,000 - $350,000 = $50,000

Example (5 years later): $500,000 - $300,000 = $200,000

Equity can increase and decrease at any time if property values change.

There are 2 typical ways to use this equity.  The first method is to sell your home.  Your equity becomes cash in your pocket.  However, with this method, you now have no home, but lots of cash.

The second method is to go to a lender such as Approved Mortgage Inc., and borrow money secured by your equity.  This is called an Equity Loan.  This way you keep your home and control of your home, but now you can turn the equity into cash for whatever purpose you need.  Many clients use their home equity to borrow cash to invest in their business, to pay off credit card debt or to renovate their homes.

Home Equity Loans are simply a way of borrowing money, secured by you assets (your home equity) to get better rates, and lower payments. The lenders know that if for some reason you can’t make your monthly payments, you can still pay the money back by selling your home or doing a refinance.

Call us today to discuss how we can help you. 403.284.4000

   

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