Home equity refers to the portion of a homeowners unencumbered interest in their real property, which is the difference between the homes fair market value and the outstanding balance of all liens on the property. In simpler terms, it is the value of a homeowners financial interest in their home. Home equity increases as the debtor makes payments against the mortgage balance, or as the property value appreciates. Homeowners acquire equity in their home from two sources: they purchase equity with their down payment and the principal portion of any payments they make against their mortgage, and they also benefit from a gain in equity when the value of the property increases.
Home equity can be used as collateral for a home equity loan or home equity line of credit. Many home equity plans set a fixed period during which the homeowner can borrow money, such as ten years. At the end of this “draw period,” the borrower may be allowed to renew the credit line. If the plan does not allow renewals, the borrower will not be able to borrow additional money once the draw period ends. Home equity can be a powerful financial tool that homeowners can borrow against to meet important financial needs such as paying off high-cost debt or paying college tuition.
To calculate home equity, one can subtract the outstanding mortgage balance from the homes current market value. Home equity can represent more than a mortgage loan being paid off, and it is an asset that homeowners can borrow against to meet important financial needs such as paying off high-cost debt or paying college tuition. Building equity through monthly principal payments and appreciation is a critical part of homeownership that can help create financial stability.
