Understanding Home Equity

Posted: 29 April 2015 by Higgins Homes

equity

Home equity is something that people seem to find confusing but it’s actually very simple. Basically, the equity is the part of your home that you own. So this is the amount of your deposit and the extent of the mortgage that you have paid off. So, for example, if you buy a home that’s worth £350,000 and you have a mortgage of £250,000 then the equity in your home is £100,000. As long as the value of the property that you have bought doesn’t dip then the amount of equity you have will remain the same.

Valuing the equity in a property – many people tend to assume that once you know the value of a property then it’s set. However, this is not the case. The value of your home is realistically defined by what someone is willing to pay for it – there are plenty of guides that can be used to estimate property values, for example where it is located, the state of repair it is in and the amenities it has – but what it all comes down to in the end is whether someone makes an offer.

What is negative equity? Negative equity is tied into property values. Essentially, negative equity occurs when a property is valued at less than the mortgage that has been taken out on it. So, for example, if you purchased a property for £350,000 with a mortgage of £300,000 and the property was now worth £280,000 then the property would be in negative equity. However, if the drop in value was not less than the mortgage – so, for example the property was now worth £330,000 – this will not be negative equity. Negative equity is normally the result of a fall in property prices or a situation where a mortgage has been granted on an overvalued property. It’s a situation that is more likely to occur with a repayment mortgage as this type of mortgage does not reduce the debt, only the interest.

Ownership – the process of paying off a mortgage is essentially one of building up equity. The more equity that you have, the more ownership you have and when you have 100% equity then you have 100% ownership. The equity in a property cannot be sold but a bank will lend money against the equity, using it as security for a loan, which is usually either a second mortgage or a line of credit.

photo credit: Equity via photopin (license)


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