Home equity is a simple concept in real estate. Essentially, it is the investment a property owner has in their property boiled down to a dollar equivalent. To understand the equity of a property, simply take the home’s fair market value and deduct any existing mortgage principal and interest payments and liens. After the deductions, you receive the home equity value.
Let’s say a property owner purchased a house that is worth $200,000 according to fair market valuation at the time with a mortgage. 10 years after purchasing, the property owner paid off $100,000 or half the property’s mortgage. The property owner later orders a new appraisal for the house. The appraiser informs the property owner that the fair market value has increased and the property is now worth $500,000. The equity of the home would be the updated fair market value minus the remaining mortgage principal and interest payments. Essentially this means that the remaining equity in the home is $400,000.
Home equity can be used for different purposes. Some of the most common uses include home equity lines of credit or HELOC and home equity loans. Both offer homeowners to receive funding based on the available equity in their property and repayment. The prime difference between the two is that one is a line of credit, which can be pulled when requested and the other is a set loan. The funds can later be used to expand a property portfolio, used for home maintenance and repair, or pay off higher-interest debt.