When it comes to real estate, there are few things more important than equity. All of the advice given to first-time homebuyers centers on how much equity they are likely to build in the time they will be living in the home. Additionally, when it comes to getting a home equity loan or selling the house, knowing how much equity you have built up is quite important. It will determine how much cash you end up with. And that is no small consideration.
A Definition of Equity
Most of the time, equity refers to the amount of “ownership” you have in a particular piece of real estate. A set amount of cash is the main expression of the equity in your property. Equity is usually built by a combination of two things:
1. Making mortgage payments
2. Increases in the property’s value
The longer you have the real estate, and make payments on it, the more equity you are going to build up in the property. And if you live in an area where the home values are increasing, you will find that helps with your equity as well. This is the reason that the general advice is to buy only if you plan to stay in a home for at least five years. This gives the property time to appreciate, and it allows you the time to pay down some of your property loan’s principal.
Determining Your Real Estate’s Equity
It is usually very simple to figure out how much equity you have built in your real estate. First, you need to find out what the current market value of your home is. You can do this by talking to a variety of real estate agents, mortgage loan officers, and appraisers. Next, you subtract the amount that you still owe from the market value of your home. The result is your equity. Here’s an example:
You bought your home 11 years ago with a loan for $115,000. Now, however, the property at current market value is worth $135,000. And you have paid down some of your loan, still owing about $75,000. To figure your equity, you subtract the $75,000 from the $135,000 for a total of $60,000. This is about how much you could expect to pocket if you sold the home at current market value, or the amount of money you would have access to with a home equity line.
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