Home Equity Explained:
Home Equity is the amount of value you have in your home and is calculated by taking the market value of your home and subtracting the amount you owe on the home. The difference is called the Home Equity. Home Buyers who purchase their home will only own a portion of the home until the mortgage loan balance is paid off where then they will fully own the home. For example, if you purchase a home for $100,000 and you put 3.5% down payment, the home equity you have is $3,500. However, if you decide to sell your home right after you have bought your home, your equity may disappear and you may need to come up with more money to close on your home sale because you need to take into account you costs such as real estate agent’s commissions and closing costs by the home seller. Each time you make your mortgage payment, a portion of that mortgage payment will go towards paying down the principal of the mortgage loan balance and the rest will go towards paying for the mortgage interest payments. The principal portion of your mortgage payments increases your home equity because it is paying down the mortgage loan balance. As you continue to pay down your mortgage loan balance amount and more funds will go towards building your equity and less funds will go towards your mortgage interest payments.
Home Equity Changes Over Time
The value of your home will fluctuate with the real estate market. For example, millions of homeowners have lost most or all of their equity in their homes during the 2008 Real Estate And Mortgage Meltdown . Many homeowners were left with negative equity where their mortgages were higher than the value of their homes. This is often called having a mortgage underwater. Tens of millions of homeowners who had tens of thousands of dollars in home equity and were counting on the equity in their homes for retirements saw their home equity disappear before their eyes and many thought that they could never ever sell their homes and were stuck there. Some areas like many parts of Florida and California had property values drop almost 50%. Foreclosure and Bankruptcy rates hit a historical high in the United States. The lucky home buyers who purchased their homes starting in 2009 and 2010 when home prices hit rock bottom saw their home equity rise double digits year after year. The South Florida real estate market is so hot right now that most home sellers are not even offering sellers concessions to home buyers. Homes that are under $200,000 in South Florida are selling the minute it goes up on the market and a large percentage of home buyers are cash home buyers and many are purchasing properties sight unseen.
There are two variable to take into account when calculating home equity. The market value of the home which is determined by the appraisal of the home and the mortgage loan balance. For example, if you have purchased a home back in 2009 for $200,000 and you put a $10,000 down payment where your mortgage loan balance was at $190,000, you had 5% equity in your home when you purchased your home. Figure six year later, which is now, your mortgage loan balance dropped to $181,000 from the principal portion payments of your mortgage payments. Say your home drops in value to $198,000 via a home appraisal. You have a 8.5% equity in your home or $17,000 which is derived by subtracting $181,000 ( Loan Balance ) from the market value of your home today of $198,000. Lets take this case scenario example further and lets fast forward another year to late 2016 and now your home has a market value of $202,000 and your mortgage loan balance has dropped to $177,000. Your home equity now has increased to 12% or $25,000 due to the combination of your mortgage loan balance decreasing and the market value of your home increasing. What you owe on your home loan is much more important than what you have paid for your home. Changes of home equity will not alter your mortgage loan amount. In the event if your home value sky rockets upwards, you have increased your equity in your home but the amount you owe still remains the same.
Importance Of Home Equity For Cash Out Refinance Loans
Home Equity is like cash in the bank. Homeowners who need cash to consolidate their debts, pay off certain debts, or need cash for other reasons can consider doing a cash-out refinance mortgage . A cash-out refinance mortgage can only be done if the homeowner has equity in their home. The refinance mortgage lender will pay off the existing mortgage and will give additional funds up to the maximum loan to value they qualify for. The maximum amount of cash-out they can get on FHA Loans is up to 85% loan to value. The maximum cash-out refinance mortgage a homeowner can get on a conventional loan is up to 80% loan to value.