open floor plan kitchen

If you’re wondering what you need to know about home equity, read on to learn about its overall importance and how to use it to afford a new home or pay for some of life’s larger expenses.

What Is Equity?

Home equity refers to the amount of a home’s value that you actually own. Yes, your signature may be scribbled on the deed, but until you’ve paid off the entire mortgage, you technically own only a share of the home’s value.

Ultimately, home equity is the difference between your home’s fair market value and the amount you still owe to your lender.

For example, let’s say that the home you purchased was $200,000. You made a 5% down payment ($10,000), and then a mortgage company financed the rest. This means that you’ve got $10,000 in equity – or 5% in equity interest.

With each mortgage payment, a portion of that money goes toward paying for the home itself (which increases your equity), and a portion goes toward paying the interest. As you pay down the amount on your loan, more money will go toward building equity and less will go toward the interest. If you want to know more about this process, check out this article on mortgage amortization.

Ever-Changing Equity

One confusing part of equity is that it’s always changing. There are two variables to consider: the appraised value of the home and the loan balance.

For instance, let’s say you purchased a house in 2010 that had an appraised value of $200,000. You purchased the home with a $10,000 down payment (your loan balance is $190,000), meaning you have 5% equity.

Fast-forward five years, and suddenly, the value of your home has dropped. Now your house appraises for $198,000. But you’ve still been paying down your loan, so you only owe $181,000. This means that you have 8.5% equity ($17,000) in your home.

Fast-forward another two years, and now your home has an appraised value of $202,000, and you have a loan balance of $177,000. Now your equity has risen to 12% ($25,000).

In the end, what you owe on the house is more important than what you’ve paid. It’s important to note that a change in equity won’t change the loan amount. Whether your home’s value goes up or down, you will still need to pay the original amount of the loan, plus interest.

Should I Buy or Rent?

When deciding whether to buy or rent a home, you should start by considering equity. If you own a home, you will generally gain equity each month. After all, a portion of your monthly mortgage payment goes toward paying off the house (which builds equity).

When you live in an apartment, your monthly rent isn’t gaining you anything. Because owning a home allows you to build equity, having a mortgage is sometimes called “forced savings.”

How Long Does It Take to Earn Equity in Your Home?

According to Professor of Law and Research Director at the Center for Urban Business Entrepreneurship David Reiss, “You start earning equity on your home as soon as you purchase it because part of our mortgage payment goes toward repaying the principal that you borrowed. The repaid principal adds to your equity in your home.”

Ultimately, Reiss claims that as your home value rises, you build additional equity.

Why Is Equity Important to Me?

Equity is a great example of an asset. In the event that you need it, you can use that money for future endeavors, such as buying a new home, paying for an important life event or even helping to fund your retirement.

Using Equity for a New Home

Let’s say after eight years of living in your home, you’re beginning a new career, starting a family or even just looking for a change of scenery. Whatever the reason, you’re ready to pack up and head to a new home.

If you’re selling a house that’s worth $200,000 and you have $60,000 in home equity, for example, you could use that money for your new home’s down payment. And because you’ll have such a large down payment, your monthly mortgage payment will then be lower than it was on your old home.

Take Advantage of a Cash-Out Refinance

While some lenders may offer a home equity line of credit (HELOC) or a home equity loan, at Quicken Loans, we offer a cash-out refinance. In this type of refinance, you take the equity you’ve earned and turn it into cash.

For example, if your mortgage balance is $150,000 and your home is worth $200,000, you may be able to refinance for $175,000, which would allow you to pull out $25,000 in cash. You could use that extra cash to pay off high-interest debt, tackle home improvement projects or finance a major purchase.

Using Equity for Your Retirement

If you’re over 62 and looking to retire, you could also consider a reverse mortgage. This is an option that allows you to stop making mortgage payments and pull from the equity that you already have on the house. In other words, you can use the value you’ve accrued in your home to help fund your retirement.

Still have questions about equity? Feel free to ask them below! And if you’re ready to make your equity work for you, speak with a Home Loan Expert today!

Related Posts

This Post Has 16 Comments

  1. We have a mortgage with Wells Fargo which orig. in 2009, and our current balance is $349,964.36. We began a Refi process with them last summer 2017, and the appraisal came in at $230,000. So, it didn’t go through. Is this considered really really “negative equity”, and like the “end of the world”? Is there any way out of this?

    1. Hi Dan:

      That would be negative equity. It’s not the end of the world. Depending on when in 2009 was originated, you may be eligible for HARP if it was before May 31, 2009. If that’s the case, you could try to refinance through that as long as your loan is owned by Fannie Mae or Freddie Mac and you qualify. We can help you look into your options at (888) 980-6716. You could also enjoy talk to Wells Fargo about a modification.

  2. My soon to be ex- husband of 40 years wants a divorce. I don’t have the cash to pay him out the $150,000 to keep the house. Would I be eligible for a cash out loan and make monthly mortgage payments? Would I be given a 1099 to write off the mortgage interest?

    1. I’m sorry to hear about your situation. You may be able to keep the house just by negotiating with him and giving up other things. Absent that, you could try to take cash out to pay him for equity stake. You might have to negotiate with him to give you time to get approved. You can talk to one of our experts at (888) 980-6716. You would get a statement to write off the mortgage interest. It’s a 1098. Hope this helps!

      Kevin

  3. We are looking a vacation home. We own our main home and have no mortgage. What is the best way to pull money out to purchase the vacation home and pay off some outstanding debt.

  4. Hi. My wife and I are looking to buy our first home. I read that it is important when making offers to ask the seller how much equity they have in the home. Why would this matter from a buyers perspective? Thanks

    1. Hi Andrew:

      The only time I can think that that would come up is if the appraisal came in lower than they were expecting and they had to pay off the loan still. They would have to make enough off the sale to pay off the loan. The only other time it would matter is that they were gifting you equity, but only family can do that.

      Kevin

  5. We are looking to get a home equity loan. Cant find an application on your site. Could you please assist?

    1. Hi Renee:

      Unfortunately, we don’t do home equity loans. You may be able to accomplish the same goals with a better rate by doing a cash-out refinance on your primary mortgage. You’ll get a better rate because it’s on your primary mortgage as opposed to a second mortgage which carries more risk for the lender and investor. You can take a look at the kind of loan options you would have through our Rocket Mortgage. You’d be able to take a look at how much equity you could take out and at what rate, getting an approval right online.

    1. Good morning, Chelsea. The best way is to have your house appraised. An appraiser will come out and decide how much the house is actually worth. There is also a “zestimate” that Zillow offers, which is an estimate of the house’s worth. Fair warning – this is not always accurate, but it’s a good place to start if you want a ballpark answer. All that being said, if you truly want to know, you will need to have the house appraised.

  6. I was just wondering why you send us a message on the definition of Home Equity, showing a new kitchen, but Quicken Loans doesn’t deal in Equity Loans?

    1. Hey, Tom. Equity goes far beyond equity loans alone. It can be used for purchasing new homes, for your retirement and even for cash-out refinancing. While Quicken Loans doesn’t deal in equity loans, you can still pull out cash with a cash-out refinance. This money is yours to use, so you can apply it any sort of project you want, such as a new kitchen. Take a look at this article about cash-out refinances, which fully details the difference between a cash-out refinance and equity loans.

      Let me know if you have any more questions, Tom. I’ll be sure to point you in the right direction. Have a nice Thursday!

  7. “One confusing part of home equity is that it’s always changing. While you may currently have 5% equity on a $200,000 house, this could easily change with the ebbs and flows of the housing market. If the housing market slips (think 2008), it could mean that your $200,000 house is only worth $185,000. Suddenly, your 5% equity only amounts to $9,250. On the flip side, consider what would happen if your house’s value shot up to $230,000. Then 5% equity would look like $11,500.”

    That’s not how equity works though. You don’t own a percentage. The equity you have is the difference between what your house’s market value is and what the value of the liens against your house are. In the above scenario, the $200,000 house starts with $10,000 equity, but the value dropping to $185,000 results in being underwater with a -$5,000 equity, not a positive $9,250 like the article says. On the flip side, the increase in value to $230,000 results in an equity of $40,000, not $11,500.

    1. Thank you for the second set of eyes, Bob! We realized shortly after publishing this that it needed to be corrected, so we updated it, but the change didn’t reflect on the live site for 24 hours. Thanks again!

Leave a Reply

Your email address will not be published. Required fields are marked *