Business, Legal & Accounting Glossary
Home equity is the assessed price or fair market value of a home minus the amount the owner owes in mortgages, home equity loans, or other debt related to the home.
Home equity is the difference between a home’s value and any debt outstanding, such as a mortgage, for which the home is pledged as collateral. Because interest in title to the property is superior collateral, lenders readily grant credit against home equity. After the mortgage itself, the home equity loan and home equity line of credit are the most common products. For the borrower, interest on debt obtained through a reduction in home equity is tax-deductible. The typical homebuyer finances a home and starts with home equity equaling the down payment. Home equity can grow through repayment of the mortgage principal and via appreciation of home value. The home is said to be owned free and clear when home equity reaches 100% of the property’s value. When the real estate owned is not an owner’s home, home equity is usually shortened to simply equity.
Home equity refers to the portion of a home’s value that is held by the homeowner free of any debt. Typically, a homeowner has equity equal to the original down payment plus the accumulated monthly principle payments minus any money borrowed through home equity lines of credit (“HELOCs”) plus/minus the change in the home’s value.
For example, if you own a home worth $200,000 and you owe $125,000 on your mortgage and have no further loans, you have $75,000 in home equity. If you also have a home equity loan of $50,000, then you have only $25,000 in home equity.
It is the equity in the home that allows it to be used as collateral for second mortgages, HELOCs, or liens. Home equity is also a significant source of retirement savings for many people, both as a reduction of expenses (a paid-off house requires only taxes and maintenance) and as a capital resource.
“Negative equity” or “underwater mortgages” refer to situations in which a homeowner owes more on the home than the home is currently worth. This situation was rare before the housing and credit boom of the 1990s and 2000s collapsed. During those decades, rapidly-rising house prices and easy credit enabled many homeowners to treat their homes like very large credit cards, taking out home equity loans for everything from renovations to major purchases to basic living expenses. However, when the housing bubble burst and prices fell, many homeowners ended up owing more than their houses would sell for.
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This glossary post was last updated: 6th August, 2021 | 6 Views.