What is Home Equity?
By Susan M. Keenan
Photo: © Kutay Tanir - iStockphoto.com
The equity of a home is calculated by taking the current market value of a home and subtracting the debt owed on the property. For example, the current market value of the home is $250,000 and the current amount of money the homeowner still owes to his lender is $115,000. If you subtract the debt of $115,000 from the market value of $250,000, the home's equity is $135,000.
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Since the initial down payment builds up equity in the property, the larger the down payment on the home, the larger the amount of equity in the home. In many cases, a larger down payment will equate to a better positioning stance for acquiring a loan as well. Most often, the home and its accompanying land and structures are used as collateral to secure the mortgage. The value of the property is used to ensure the lender that he will not lose his investment.
Once a homeowner has lived on the property for several years and paid into the home loan or mortgage, the equity of the property increases according to the amount of each monthly payment that went toward the principal portion of the loan. If more than one loan has been taken out using the home as security for the loan, the balance of each loan must be subtracted from the current market value of the property to obtain the current equity. |
