The term equity is one that you hear quite often in the financial world. In relation to mortgages, the definition of home equity is the market value of a property that the borrower has already paid for. So if the market value of the house is $100,000, and the borrower has already paid 10% of that price, their home equity would currently be $10,000. As more of the mortgage loan is paid off, the equity in the home increases.

The above is a basic definition of home equity. However, there are always more factors that affect the value of one’s equity value. These can include liens and second mortgages, which are amounts that must be deducted from the market value.

Other Factors That Affect Your Home Equity

Liens- In relation to real estate, a lien often comes in the form of a mortgage, which basically stipulates that if the borrower cannot make the agreed upon payments, the property can be seized (foreclosed) and sold to satisfy the debt. However, liens also come in smaller amounts of the total market value, which decrease the home equity to the proportion that is still owed for that particular portion of the real estate.

Important to note is that one of the worst mistakes a purchaser of property can make is buying real estate with hidden liens attached to it. In some states it is considered illegal to conceal liens, so it is always a bad move to proceed with the purchase of a home without some type of insurance for protection.

Second Mortgages- Refinancing your home can also lead to a decrease in the equity value of your home. A second mortgage is when a borrower uses the equity in their home as collateral for taking out another loan with the intent of satisfying the payments of the first loan.

Other Ways That Home Equity Can Be Used As Collateral

In addition to taking out second mortgages to keep up with payments, it is common for the ambitious borrower to attempt to increase their home equity by making improvements to the house themselves. A line of credit can also be taken out against the equity of a house for such personal reasons as consolidating previous debt or paying for college tuition.

This is not necessarily a good idea as the same risks apply to these loans as to the initial mortgage. By using your home equity as collateral you are, in effect, decreasing the amount of the property that you actually own. Until these loans are fully paid off, you will not fully own the house even after the initial mortgage has been paid off.



Conclusions About Home Equity

It is due to the many uses of home equity that its application in the financial world is so popular. Not only can it be used as collateral, but the interest paid toward the different types of equity loans is usually tax deductible, which enhances it financially.

To learn more about home equity and how it may apply to your own financial future, speak with one of our knowledgeable lending partners. Fill out our free contact form, and take the first steps toward your future home today.