Home Equity

The ownership value created in a home which represents the reigning house market value less any mortgage amounts owed. For instance, if a borrower has $100,000 on their mortgage, there isn’t any lien on the property and the current market value of that home is $150,000, then home equity is equivalent to $50,000 (150,000-100,000).

The buyer enjoys initial equity through the down payment made during purchase. Below are some of the other ways your home equity can either increase or decrease:

Circumstances Which Can Lead to an Increase in Home Equity Levels

  • When there is insufficient housing to match the demand
  • When payments are made towards the principal of the mortgage
  • During general economic inflationary trends
  • When improvements are made to the property such as kitchen upgrading, landscaping or repainting

Circumstances Which can Lead to a Decrease in Home Equity Levels

  • When housing supply exceeds the demand level
  • When the borrower takes out a second mortgage on their own property
  • In case a borrower refinances and gets cash in order to pay bills as well as other expenses.

One of the best ways to pay off the high interests of credit card bills as well as other expenses is to use a credit line in borrowing against your home equity. However, it reduces your home equity significantly. The interest-only mortgage has been the most popular in the recent past because borrowers are allowed to pay interest on their mortgage during the first few years of the loan before commencing principal repayments. And paying interest only and nothing on the principal has the benefit of increasing one’s home equity if the remaining home valuation factors remain the same. Interest-only loan borrowers benefit from the home equity increase when prices of the home rise as a result of increased demand or inflation.

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