What Is Home Equity? A Quick Guide for Homeowners

The rising prices of Las Vegas real estate can be good news for homeowners across the state – and the nation, in fact. This is because as prices rise, so does your home equity, giving you more financial freedom and buying power.

However, home equity can be a very confusing subject – especially for first time home owners[h1] . Of course, luxury real estate in Las Vegas has more home equity than regular homes, so it might it important to understand the power you hold.

In this article, we will look at what home equity is, how it works, what you can do to unlock it, and more. So, let’s dive in!

What Is Home Equity?

There are two ways to look at home equity.

Home equity can be described as the market value of your interest in the home itself as well as the property (land). This fluctuates with time as you continue to make more and more payments toward your mortgage, if any. This value is also impacted by market forces – particularly demand.

Another way to look at home equity is to calculate the difference between what you owe on your mortgage and the selling price of your home based on the current market. As you continue to make payments toward your mortgage, naturally the payables decrease, while the market value remains constant or keeps increasing, thus increasing your home equity and, in turn, your net worth.

Example of Home Equity

Let’s say you purchase luxury real estate in Las Vegas worth $1,000,000. You chose a mortgage plan where you made a 20% down payment and covered the remaining $800,000 with it. So in essence, you now have equity of $200,000 in the property or the home, thus making it your home equity.

After 5 years, let’s say that the house values the same, but you have managed to pay off $600,000. So now, your home equity becomes $800,000 ($200,000 + $600,000). If, however, the market value increased to $2,500,000 in the five-year-period, the case would be different.

To calculate your home equity now, you will simply subtract the $200,000 you owe to your mortgage lender from the market value, i.e., $2,500,000 less $200,000. So now, at the end of the period, your home equity would stand at $2,300,000.

Such a drastic increase in home equity usually only happens for luxury real estate, not ordinary property, though.

How Home Equity Works

Based on the explanation above, it seems like home equity is something that we ‘make up’ and is not something tangible unless we have an offer in hand, right? That isn’t really the case. To understand how home equity really works, consider the following;

Let’s divide a 4-bedroom home you purchased for $100,000 into four parts. You purchased it with a down payment of 20%, so, out of the four bedrooms, you own just 1 room. The other three; you are paying ‘rent’ for to the original owner, i.e., the mortgage company. As you continue making payments, you are essentially buying your home back.

So, home equity is the portion of your home you possess. If you own just that 1 room and decide to sell the house, even if you do so for a profit, it is important to note that you will be selling just your room for the profit. The other three will be sold by the lender at the amount it was sold to you.

Home equity can be used by homeowners to help with financial issues – but you need to be smart about it. It is important to consider carefully when you should use your equity. You can go to financial institutions at any time and ask to borrow a certain percentage of your equity against an interest in the house.

Let’s consider the same example as above, again. If you have a home equity of $2,300,000, you can use it to get a certain sum, but it is important to note that you can’t just go to a bank and ask them for $2,300,000. The amount you can ask for and the conditions they set will depend entirely on your credit history and other factors.

This can either be a home equity line of credit (HELOC) or a home equity loan.

Home Equity Line of Credit (HELOC)

HELOCs are a continuous form of loan amounting up to 85% of your home equity. Considering the example above, you may get a HELOC of up to $1,925,000 (85% of 2,500,000 less $200,000). The funds can be used for any purpose, but the best way to utilize them is to make capital additions to your home.

This can include anything from adding a pool to a fireplace, patio, gym, or more to enhance your luxury real estate in Las Vegas further. HELOC loans usually have adjustable interest rates.

Home Equity Loans

Apart from HELOC, you can also use your home equity to score favorable terms for a traditional loan. These loans are basically a second mortgage on your home. The lender will turn your equity into a lump sum amount and give it to you in return for an interest in your home.

It is important to note that this loan acts just like any other mortgage and if you are unable to make payments, the lender is entitled to evict you and foreclose it. However, these loans aren’t as long-term as traditional mortgages and can be paid off in a shorter time, i.e., 5-10 years, depending on your need.

You can even use the proceeds to buy a new home, if you feel so inclined, give it up for rent, and make payments from that!

Home equity can be a great asset for you and your family and help you in your time of need. However, we recommend caution when utilizing the equity, since there is a lot of risk involved. If you’d like to learn more about home equity or would like to discuss options about utilizing the same, get in touch with us at The Vegas Group to make an informed decision!

Disclaimer: There are numerous factors to consider in every investment, including real estate. The information provided above is just a matter of opinion and can change with time. It shouldn’t be construed as legal or tax advice; neither does the report constitute a financial promotion or investment advice. It is general information and before making any such decision, you should seek out licensed professionals and see all ends clearly.

 [h1]Link to first time home buyer program article