What is Equity?

In the world of finance, one cannot miss a particularly important word that is used quite often. This word is equity. There are many different definitions of the word equity, and the particular definition will depend very much on context. Generally speaking, equity is the value in an asset after the value of any debts owed on that asset is subtracted.

Equity is present in margin trading, in investment strategies, in a company balance sheet, and in stock that one owns in a business, called shareholder’s equity. However, equity is most commonly connected with real estate, specifically known as home equity.

What is Home Equity?

Home equity is defined as the value of a mortgaged property after the deduction of the charges against it. In other words, the equity in home is its monetary worth once you take its current value then deduct what is still owed on it.

If the answer to the question “what is equity in a home” was presented as a mathematical equation, it would look like the following:
Current Market Value – Mortgage Balance = Your Home Equity.

In general, the more equity a homeowner has, the more beneficial it is to them. Many people regard their home equity as how much of the property that they own outright. Because homeowners may leverage their home equity as a form of personal wealth and capital, they commonly desire to raise the equity in a home. Fortunately, there are ways your equity can increase.

Increasing Home Equity

One way your home equity can increase is when your home value grows due to the current real estate market. If the market is very good, the worth of your home will increase while the amount you owe stays the same, thus boosting the equity in your home. Making physical upgrades to your home in order to increase its value may have the same effect, but this generally involves a significant out of pocket expense, as well as knowledge of the housing market.

A second way the equity in a home can increase is to pay down the loan on the house. Every dollar you repay is a dollar gained in equity. When you repay your home’s loan, then you own a larger portion of the property, so your equity in house increases. When there is more equity, there is more money available to access.

Tapping into Your Home Equity

Accessing equity is very important for many homeowners, as they can use it to fund different aspects of their lives. There are four basic ways for a homeowner to access money from the equity in a house.

1. You can refinance your existing mortgage (a so-called cash out refinance).
2. You can get a home equity loan.
3. You can open a home equity line of credit (HELOC).
4. If you are age 62 or older, you can get a reverse mortgage, and choose a disbursement option of line of credit, lump sum, monthly income, or a combination of any of the three.

In all options except the reverse mortgage, homeowners must pay a monthly mortgage payment. This is why many homeowners find that the reverse mortgage option is often most helpful, and why many senior homeowners find it most beneficial to go the reverse mortgage route.

Home Equity and Reverse Mortgages

So what is a home equity in relation to reverse mortgages? If you’ve ever been interested in a reverse mortgage, you may have learned that reverse mortgages are loans that may convert the equity in your home into cash that you then can use however you’d like.

The equity in a house then becomes increasingly important once a potential borrower is weighing the decision of whether or not to get a reverse mortgage. This is because the equity on a house will help determine the amount of cash a reverse mortgage borrower may receive at the closing table. The loan amount granted will first pay off the remaining mortgage, if any, plus any financed closing costs, and the rest will be disbursed as cash to the borrower. While paying off the existing mortgage and eliminating the associated mortgage payment is significant, how much cash is available also affects how much a reverse mortgage can help a potential borrower pay for their retirement expenses. If you have a significant amount of equity and a low mortgage balance, then you may qualify for a good amount of cash from a reverse mortgage.

With the equity you access, you can do a lot of things, including paying off credit card debts, medical costs, and daily expenses. The cash from your equity will be yours to use as you’d like, and in many cases, can act as a second income stream for seniors. Equity can thus become one of your most valuable assets.
 

Sources:

“Equity”. Investopedia.com Investopedia. ND. NP. Web. 29 Jan 2015. http://www.investopedia.com/terms/e/equity.asp

“How to Access the Equity in Your Home”. WikiHow.com. WikiHow. ND. NP. 30 Jan 2015. http://www.wikihow.com/Access-Equity-in-Your-Home

Pritchard, Justin. “What is Home Equity”. Banking.About.com. About Money. ND. Web. 29 Jan2015. http://banking.about.com/od/mortgages/a/What-Is-Home-Equity.htm

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