Many home buyers and home owners are confused about home equity and what it really is. Buyers and sellers in Baltimore Maryland can benefit from increasing home values and the subsequent increase in home equity. They can use their home equity to leave something to their heirs, they can borrow against it or they can use this equity when they purchase another home. Your down payment is the first home equity amount that you will have and if the market does well and you meet all of your monthly payments it will only grow larger.
So What is Home Equity Anyway?
The best way to explain home equity is through an example. If you were to purchase a home for $200,000 and you had 20% as a down payment or $40,000, your equity in the home on the day it was purchased would be your down payment or $40,000. As many have learned over the past few years the price of homes can go up and down. However, housing markets are recovering and the price of homes are going up.
If you were to assess the market value of your home in one year’s time, many consumers find that their homes value will have gone up 5 to 10% in some markets. If your home increased in value by 10% or $20,000, your home would now be worth $220,000 and you would now have $60,000 in home equity.
Homes increase in value for several reasons. The market may go up as we have just discussed. Homeowners may also improve their homes which can also improve the value of their home as well. For example, landscaping will improve the curb appeal. Perhaps you upgraded the carpets to hardwood flooring or built a family room in the basement along with a bedroom and a bathroom. All of these improvements can increase the value of a home. Note that while your homes value should increase, it may not increase as much as the investment you have put into the home.
Homeowners also pay their mortgage each and every month. The mortgage payment consists of interest accrued on the balance of the mortgage and initially a small principle repayment which contributes to increasing your equity.
How Can You Use Your Equity?
When you sell your home the equity in your home is yours to use on a down payment for the next home. Of course the larger the down payment, the lower the mortgage payment and the faster you can pay off your home.
Many consumers will arrange for a home equity loan taking advantage of the equity they have in their home. A home equity loan could be a fixed second mortgage at a fixed interest rate and monthly payment. Home equity loans are also available as home equity lines of credit. A line of credit can be drawn on and repaid as needed which is very useful if your planning renovations and will need funds over a period of time.
When Does Home Equity Decline?
The equity in your home can decline for a number of reasons. In a down market homes can actually lose market value which eats into any equity you may have. Home owners occasionally cannot afford to improve their homes and perhaps not even the maintenance that is routinely required for a home. In situations like these, the value of the home declines even though the market is going up. There is just too much work required and associated expense for the home owner to be able to afford.
Sell Your Home to a Professional Home Buying Company
Consumers in Baltimore MD faced with the above situation will sometimes sell their homes to a home buying company who will in turn either rent the home out or complete repairs and resell the home. The advantage to the home owner is that they avoid paying a real estate commission, they avoid the repair and upgrade costs and they are able to close the sale of their home quickly. If they have home equity in the home, they will receive the difference between what the home sold for and their remaining mortgage balance.
Home equity can be a significant part of your net worth. For many people buying a home it is the single largest transaction they will do in their lifetimes and the equity in their homes represents a significant portion of their savings.