What is Equity?

Equity was something that took me a little bit to understand. I understood WHAT is was, but didn’t understand HOW it worked. So if you are in the same boat I was, let me try and break it down for you.

Home equity is the market value of a homeowner's unencumbered interest in their real property, that is, the difference between the home's fair market value and the outstanding balance of all liens on the property.

As you can see, the home equity is the DIFFERENCE between the value of the home and what is owed. So what you do with that equity can vary. If you are in the rental business, you can use this equity as a down payment for a new property. For example, if you were looking to buy a property that cost $200,000, you would roughly need $40,000 as a down payment. You could take $40,000 equity and use that as a down payment, therefore saving you a lot of cash.  When you do use equity as a down payment, it does NOT affect the mortgage of the home you are using the equity from. It does however increase your new property’s mortgage just slightly due to the purchase being 100% financed. Once you use the equity from another property, it will take a number of years to rebuild the equity.

Another option would be to use that home equity and turn it into a line of credit. Having a line of credit is similar to a credit card, except its often a much higher monetary limit, lower interest rate and it can be pulled out for cash at any time. Its not a bad idea to have a line of credit handy to help cover any emergencies, college funds, or renovations that you may need instant cash for. Line of credits can either be revolving or non-revolving. A revolving line of credit is one that you can use, pay off and then use again. A non-revolving line of credit is one that once you use it, you have monthly payments to pay it off and once it is paid off the account is closed. I personally prefer the revolving because you will always have some cash if needed for any reason.

Having a line of credit is also handy if you have rentals. It will give you cash that you could use to purchase a home, provide a better offer on a home, or do renovations and use the rental to repay the line the credit.

Overall, once you build equity in a home you can then leverage that in different ways. My banker once told me its always better to use the bank’s money then your own. So if you have the opportunity to keep more cash in your pocket and leverage equity, I would do it!