Home Equity Questions Answered

If you intend to rent a house or apartment your entire life, this audio program may not be of any use to you. But then again, you may find yourself owning a piece of property and wondering what your home equity is and how it affects your home. Each home owner has to deal with home equity from the moment they sign the mortgage papers.

Over the course of the ownership, your equity builds and you might wonder how to benefit from all of those payments. Equity can also help you when it comes time to sell your home and purchase another. For first time home owners equity can be confusing but with a little research and investigation, you can understand the value of your home and how you effect how you build up equity. Keep reading this article to understand how equity affects buying, selling and owning a home.

What is home equity?

Home equity is the amount of monetary difference between what is owed on the home and what the home is worth. It can vary according to what the condition of the home is and how much work you have put into the home. Some times home equity can go up without you doing anything at all. If the neighborhood prices begin to soar, your equity can rise as well since your assessment and value will rise. Home equity is a great thing to have in case you have an emergency.

How do I get home equity?

The traditional way to get home equity is to purchase your home and begin making payments. After you have made payments, the difference between what your homes's worth and what you have remaining is the equity. It can also be built by purchasing a home beneath its assessed value. The lower you buy a home below its assessed value, the more equity you have when you initially sign your mortgage.

How do I use it?

If you want to use the equity in your home, you will take out what is known as a Home Equity Loan or HEL for short. Home equity is a bit of a misnomer. Yes, you have a house that is worth more than you owe but it is not like having a checking account that has more money in it than you have bills to pay and you can simply draw out the excess. To gain access to the equity you have to take out another loan, often called a second mortgage, which does require repayment. You still have to have good credit and you are using your home as the secured asset to guarantee repayment of the loan.

If I buy a home, how long should I wait before using my home equity?

You should wait as long as possible before using that equity. You do not want to use it unless you absolutely must because it means another payment you have to make. Yes, the equity is yours but you should only use it in case of emergencies or to pay off other bills that may be draining your finances. Many people will pay off credit card debts, college tuitions, or medical bills with a second mortgage.

The house I bought was much lower than its appraisal. Is that a good thing?

Buying a home at a lower price than its appraisal is a great thing because it means you have instant equity the moment you sign the mortgage papers or accept the deed. Of course if you paid cash and bought the house outright, you have quite a bit of equity but most people cannot afford to pay cash for a home and must finance their homes. Mortgage companies love when you can find a home that is being sold at less than the appraisal because it means that if you fail to make your payments and they repossess, they can sell the home at a profit.

If I want to get into the house flipping market, should I look for homes that have the potential for huge sales through their equity?

Yes, you should definitely look for homes that assess for more than what the asking price is listed. That way when you are finished with the home improvements, the value of the home will rise and you can ask more for the home. When you combine that new selling price with the already built up equity you have a home that will make you a bigger profit upon selling. The one note of caution would be to pay careful attention to how much you ask. You do not want to have to make several payments on this home because it will eat into your profit margin. Keep the asking price reasonable in order to sell the home quickly.

How does home equity affect my mortgage?

Unless you refinance your mortgage, your home equity will not really be a factor in your mortgage. It will be a factor in whether or not you can take out a second mortgage. Most people, if they have a huge house payment and have built up a sizeable equity, will refinance their loan to a better interest rate and a lower payment. This helps keep their budget more manageable and may even allow them to pay the home off quicker because it allows them to make more payments to the principle.

Does it affect my interest rate?

Unless you refinance your mortgage to a better interest rate based on your available equity, it will not affect your current interest rate. If you have made all of your payments on time and your credit rating has increased, it may be a great idea to refinance your mortgage to receive a better interest rate. But you need to pay attention to the mortgage company's interest rate at that time. You definitely do not want to refinance only to find out that you are going to pay a higher interest rate. You also want to stay away from Adjustable Rate Mortgages that have interest rates that change. You could have a low payment one month and the next have one that is suddenly doubled.

What is a reverse mortgage?

A reverse mortgage works by using the equity in your home to pay you. It is only available to seniors who either have a very low debt on their home or own their home outright. The mortgage company uses the equity in the home to make payments to you and upon you leaving the home, the remaining equity and home is sold to fulfill the debt.

Who can use a reverse mortgage?

Only seniors age sixty-two and older can use a reverse mortgage. They must either own their home outright or have a low enough debt on the home that the home can be paid off at closing. It is a great way for seniors to supplement their income in their later years by using the equity in their homes that they have worked so hard to pay off.

What happens to my home when I die?

When you pass on and the proceeds from the home sale exceed the amount left owed the bank or mortgage your heir will receive the profits. If there are still amounts left to pay, your heir will need to refinance the amount and pay off the remaining debt or let the bank repossess the home.

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