What is Home Equity and How Does if Affect Me?

When you buy a home you not only end up owning a property all your own, you also enjoy lower monthly payments than you generally would in a rental along with other countless advantages.  And while these are definite benefits, the real advantage of home ownership lies in the home equity you’ll accumulate.

What is home equity? Put simply, home equity is the portion of the home you have paid off- the part that isn’t owned by the bank who handles your mortgage. So how does home equity affect you?  Read on to find out!

How Much Equity Do You Have?

The amount of equity you have in your home determines your potential earnings if you sold your home right now. It is the value of your home, minus the outstanding balance you currently have on your mortgage loan.

Here’s an example: John is considering putting his home on the market. His excellent North Houston Realtor does market research and determines the property is worth about $290K, given the local comps. He checks his lates mortgage statement and finds that he currently only owes $145,000 on the existing loan (which he took out 10 years ago when he bought the home.) In this situation, John has a 50-percent equity stake in his home. If he were to sell his home right now about half of the revenues from the sale (less closing and Realtor fees) would go straight into his pocket. That’s nearly $130,000 … in profits.

Expert tip: homeowners can increase their home equity over time just by making bigger payments toward their loan.

The Plain and Simple Truth

Home equity is a big deal, and it’s one of the most important reasons to buy a home instead of renting one. The more home equity you have, the more cash you’ll get back when the home is sold.

Part science, part skill, getting the most equity out of your home requires the expertise of a Realtor, and timing the sale with housing market peaks.  As the market improves and your home’s value appreciates, your equity stake follows suit. This is why working with a Realtor on the sale of your home is crucial!

Profits, HELOCs, & More

Though equity can add up to a handsome payout when you sell your home, that’s not the only benefit of having some serious stake in your property; you can also use home equity to take out what’s called a HELOC, or Home Equity Line of Credit.

HELOCs allow you to essentially borrow against your home equity (as collateral) for college funds, retirement, renovation projects or other long-term investments.

No matter your intentions – obtaining a HELOC or selling your home for an accumulated equity payout, home equity is the key to getting the most from your transaction.