Your home could be filled with more than just memories. Your home equity can open the door to a world of possibilities! Homeownership often proves itself as an invaluable asset, providing you access to cash accumulated from years of mortgage payments. But what is that money actually worth?
Home equity can be your greatest source of collateral! You can use this option to pay down debt or make updates to your home. Let’s look at how to figure out this value and discuss ways in which it could give you financial freedom or help turn dreams into reality.
What Is Home Equity?
Home equity refers to the current market value of your home minus the outstanding mortgage balance. In other words, it’s the real estate asset’s current worth minus the amount still owed on any mortgage or lien. Home equity, therefore, represents the portion of the home that the owner truly owns outright, and it can be used as collateral for a loan, credit line, or other financial opportunities. Home equity can increase over time as the property’s value appreciates or as the mortgage balance is paid down.
How Can I Calculate My Home’s Equity?
You can determine your home equity by subtracting the outstanding mortgage balance from the current market value of the property.
Home Equity = Current Market Value of Property – Outstanding Mortgage Balance
For example, if a homeowner’s home is currently valued at $500,000, and they have an outstanding mortgage balance of $300,000, their home equity will be:
Home Equity = $500,000 – $300,000
Home Equity = $200,000
This means that the homeowner has $200,000 of equity in their home. Keep in mind that home equity will naturally increase as the mortgage balance decreases over time or as the property’s value increases.
How Can Home Equity Change?
Your home equity can change for several reasons, including:
A home’s value can appreciate over time due to several factors, including:
- Location: The value of a home is largely influenced by its location. A desirable area with good schools, easy access to amenities and transportation, low crime rates, and a growing job market can increase the demand for homes in the area, leading to higher prices.
- Supply and demand: A limited supply of homes available in a certain area combined with high demand can lead to increased property values.
- Economic growth: Economic growth and development in an area can increase demand for housing, leading to an appreciation in home values.
- Inflation: The general increase in the price of goods and services over time can also impact the appreciation of a home’s value.
- Interest rates: Changes in interest rates can impact housing affordability, which can either raise or lower demand and home values.
It’s important to note that while a home’s value can appreciate over time, it’s not guaranteed, and many factors can influence it both positively and negatively.
Paying down the mortgage changes a home’s equity by reducing the amount of debt owed on the property. With each mortgage payment made, a portion of the payment goes towards paying down the principal balance of the loan, while the other portion goes towards paying the interest charged on the loan. Over time, as more payments are made, the outstanding amount of the loan decreases, resulting in an increase in the home equity.
For example, if you purchase a home with a $200,000 mortgage and make monthly payments of $1,200, over time, the balance owed on the mortgage will decrease. As the balance decreases, the amount of equity you have in the property will increase. For instance, after several years of making mortgage payments, the balance of the loan may have decreased to $150,000, which means that you now have $50,000 in home equity.
Home improvements can change a home’s equity by increasing the property’s value. Improvements to the structure or design of the home can make it more attractive to potential buyers, leading to an increase in demand and a higher selling price. Making upgrades and improvements to a home can also improve its functionality, energy efficiency, and overall livability, making it more desirable to potential buyers.
For example, adding a pool, a guest suite or a new bathroom can increase the value of the property. Similarly, upgrading the kitchen, installing new appliances, or replacing outdated materials with modern ones can also increase a home’s value. Over time, as the property’s value increases, so does the amount of equity that the homeowner has in the property.
It’s important to note that not all home improvements are equal when it comes to adding value to a home. Some upgrades and home improvements have a higher return on investment, while others may not add significant value. Adding to or renovating the garage, for example, generally does not add as much value as remodeling the kitchen or adding a new bedroom.
Market conditions can change a home’s equity by affecting the level of demand for homes in a particular area. When demand for homes in a given area is high, home values typically rise, and when demand is low, home values typically fall. Various factors can influence market conditions, including changes in population, local economic trends, interest rates, and current events such as pandemics or natural disasters.
For example, during a time of economic expansion or population growth, demand for homes may increase, leading to higher home values and more equity for homeowners. Conversely, during times of economic contraction or population decline, demand may decrease, leading to lower home values and less equity.
Outstanding debt has the potential to reduce a home’s equity. When a homeowner acquires additional debts, borrows against the equity of their home, or fails to make regular mortgage payments, they can accrue new liabilities or reduce their equity.
For example, if a homeowner takes out a second mortgage, then their overall debt increases. This can decrease the net worth of the homeowner and reduce the equity in the home. Similarly, if the homeowner fails to make payments on their mortgage or takes out a large loan against the equity in their home, they may experience a decrease in equity.
In short, outstanding debt can reduce a homeowner’s equity by increasing their overall liabilities and reducing their net worth. It’s important to manage debts carefully and to make all mortgage payments on time to avoid a reduction in equity.
Home Equity: A Powerful Tool for Homeowners
Overall, homeownership can provide homeowners with a powerful financial tool in the form of home equity. As home values increase and mortgages are paid down over time, the value of a homeowner’s equity can increase, opening a range of financial opportunities that are not available to renters.
If you’re interested in buying a property or utilizing your home equity to purchase another property, reach out to Galaxy Title and Escrow today. We can discuss your options with you!
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Mitchell has been a licensed attorney since 2014 and has practiced in both the transactional and litigation fields of law. His experience allows him to approach every transaction with a depth of knowledge and practical experience most attorneys do not possess. Mitchell prides himself on providing top notch service to his clients.