|What Is Home Equity, and Why Is It Important?
QUESTION: What Exactly is Home Equity?
ANSWER: Home equity is the current market value of your home, not including the money you still owe. You can increase your home's equity in one of two ways: by paying down the principal of your loan or from the increasing value of your home.
For instance, when you purchase a home for $300,000 and put down $60,000 as a down payment, your lender provides the remaining $240,000. In this instance, you would have $60,000 of equity in the home.
Fast-forward five years down the road and you've been making regular mortgage payments. You now owe $225,000 on your home, but now your home's value has jumped to $350,000. You now have $125,000 of equity in the home ($350,000 minus $225,000).
However, it's important to note that if your home loses value, it can negatively affect your home's equity. For example, if you've paid down the mortgage to that $225,000, but now your home is only worth $275,000, your home's equity is only $50,000 ($275,000 - $225,000). This is less than the $60,000 you used as a down payment.
Home equity is one of the most important financial benefits of owning a home. You can tap into the equity when you sell your home, consolidate debts, or pay for major home improvements.
While you can look at online real estate sales to learn about your home's estimated value, this answer only provides a rough estimation. To learn exactly what your home is worth when it comes to home equity, you need to reach out to a trusted real estate appraiser. This person can provide an official valuation of the current market value of your home.
Sources: Nerdwallet.com, Investopedia.com, Keepingcurrentmatters.com