What is Equity?
Equity is the market value of an asset, such as a home, stock, or business, minus any liabilities, such as loans or liens. Equity is thought of as the profits after the sale of an asset for fair market value, after paying off any costs that could be associated with the sale.
One of the biggest advantages to owning real estate is that homes and commercial buildings gain equity over time, which increases personal wealth! Equity increases for three reasons:
- Monthly Payments – as a homeowner, when you make payments toward your mortgage, your owed balance decreases. This lowers the liability toward your home.
- A Growing Real Estate Market – currently, in the Colorado market, and throughout most of the United States, home values are going up. Buyers are willing to pay more over time for the same home. This increases the value of the asset. This is called appreciation.
- Low Interest Rates – interest rates are low, historically speaking. A low interest rate means that less money is being paid the bank to finance the loan, and more of the payment is going toward principal. Lower interest rates give buyers more buying power.
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How to Access Your Equity
When You Sell
Many people use the equity on their next home purchase.
- Equity in your home allows you move to a bigger home as life and your needs change.
- If you decide to move to a smaller or less expensive home, your equity is returned to you upon the sale of your house.
Home Equity Loan
You can take out a loan against your equity and use the money for other expenses. To get a home equity loan, you must contact a bank or lender. The loan is a second mortgage that you must make payments on.
- A good use for a home equity loan may be home improvement that will increase your home value.
- Make sure to research your return on investment (ROI) because not all remodels mean buyers would pay more for your your home. Many changes are taste specific and could cost you money.
- Be cautious about paying off current expenses or debt with your home equity.
- You will be taking value out of your home to pay old bills, and it is easy to run up debt again.
Types of home equity loans:
- Second Mortgage – a lump sum is provided and payments are made on a monthly basis.
- Home Equity Line of Credit (HELOC) – like a credit card, money is only drawn when necessary and payments are small at first, then larger payments required after a number of years.
If you have a large amount of equity upon retirement, you can obtain a reverse mortgage. Basically, the bank will provide elderly homeowners with an income based on the equity. There are specific risks for retirees and their heirs.
A Word of Caution
Always review the risks and benefits of taking equity out of your home and spending it. Equity is added to your net worth and spending your equity means that you have less wealth. Oftentimes repayment of equity happens over a long period of time and the investment may not pay off. Another consideration is that the market fluctuates and if home prices decrease, you could end up with negative equity, which will make selling your home difficult.
Call an Expert for Questions
Do you have questions or not sure if you have equity in your home? Help is a phone call away.
Contact me for a FREE Home Valuation, along with a Market Analysis in your area. YOUR Colorado real estate expert can tell you if you are in a position of equity.