Understanding

Home Equity

American Dream Realty can help you with your Home Equity needs.

Home equity is the difference between the current market value of your home and the outstanding balance of your mortgage. In simpler terms, it represents the portion of your home’s value that you own outright. When you purchase a home, your initial stake in its equity is equivalent to your down payment or the amount of money you contribute out-of-pocket, separate from the mortgage financing.

Here are some key points about home equity:

Definition:

Home equity is essentially what you own in your home, calculated as the difference between the property’s current market value and any liens (such as a mortgage) attached to it.

Growth Over Time:

As you make mortgage payments and the property’s value appreciates, your home equity can increase.

Immediate Equity:

When you make a down payment of 20% or more on a house, you immediately have equity.

Equity Calculation:

To calculate your home equity, subtract the loan balance (obtained from your mortgage lender) from the value of your home.

The formula is:

Equity=Value of home−Loan balance

Example: Suppose you buy a home for $300,000 with a 20% down payment (covering the remaining $240,000 with a mortgage). Initially, you have equity of $60,000. Over the next two years, if the house’s market value remains constant and $15,000 of mortgage payments reduce the principal, your home equity would grow to $75,000. If the home’s market value also increases by $100,000 during that time, your equity would then be $175,0001.

Using Home Equity:

You can leverage your home equity by:

• Home Equity Loans: Borrowing against your equity with a fixed-rate loan.
• Home Equity Lines of Credit (HELOCs): A flexible credit line backed by your home equity.
• Cash-Out Refinancing: Replacing your existing mortgage with a larger one and receiving the difference in cash.
• Reverse Mortgages: Available to older homeowners, allowing them to convert equity into cash.

Remember, home equity can be a valuable asset for meeting financial needs, such as paying off high-cost debt or funding education. However, it’s essential to use it wisely and consider the associated risks