I’ve been searching for 20 minutes for an answer I already likely know. But no one mentions it! They just tell you how to get a home equity loan. Back up. Before I go further in debt, first tell me:
What is home equity?
My understanding is that it is the amt. of your house that you actually own. That is, you’ve so far paid off $50,000 of the $150,000 principal on your mortgage, so you can borrow against that $50,000. Or, you’ve paid off your house entirely and it’s what the current mkt. value of your house is.
Let’s say you have a house that cost you $100,000, and you took an $80,000 mortgage to pay for it. You immediately have $20,000 in equity. Now let’s say that you still owe $80,000 on the mortgage, but the house has been appraised at $120,000. Magically, you now have $40,000 in equity.
Since appraisals aren’t an exact science, most lenders hedge and will only loan you up to 85% or 90% or some percentage of your equity.
Also: You’ve paid off $50K on the $150K house, but prices have gone up and the house is now worth $175K. So you can borrow against the $75K worth that is not currently acting as security on the first loan.
Or: You’ve paid off $50K on the $150K house, but prices have gone down and the house is now worth $125K. So you can borrow against the $25K worth that is not currently acting as security on the first loan.
Yep, you’ve basically got it, with one small change. the equity you own is the the current value of your house minus the current principal you owe on your mortgage.
Say you bought a $100 000 house five years ago and put 10% down. At that time you owed the bank $90k and your equity was $10k. Five years later, you now owe the bank, say, $75k. But the current market value of your house is no longer $100k, it’s now $120k. So the equity that you own is now $120k - $75k = $55k. Not a bad investment of $10k, but it all depends on the market. What if housing values went down? You may end up owing more than the house is worth!
