Submitted by ShadowLotus89 t3_125afuw in explainlikeimfive
Purchasing first home and on the loan estimate it shows a portion for equity. I've also heard ppl speak about using equity on an owned possession to purchase something else. Most recently heard my dad was upset because their insurance hiked their rate without notice and it messed with their equity in their home. Help I'm confused!
Equity is a liability that will eventually become an asset.
At this moment, your paying a bill. But that hill has an end date and once that end date arrives, you will own it and you will be able to sell or so what you want with the asset.
The equity in a home is how much of that debt you have converted into an “asset”. If the house is worth 200,000 and you have a 100,000 paid off, you have a hundred thousand dollars in equity.
You can also gain or loss equity if the value of the asset goes up or down. I’d think of it as what you would get to keep after selling it at the current market value and paying off any debt.
Say I loan you money for 10 apples. Because it's my money I own the apples. You make a payment and that pays for two of the 10 apples. You now own those two apples. Bob really wants ten apples so you sell him all ten. I am ok with this because I get my money. Your equity was the two apples you paid off.
Equity is the value of the home, minus the balance of the mortgage loan. So if you put down 10% when you buy, you start with 10% equity. Your equity would then grow as you pay down the mortgage and as the home value appreciates.
When you build enough equity, you can borrow against it. This is sometimes called a home equity loan or second mortgage. Say you've been paying down your mortgage for a few years, and home prices have increased since you bought so your equity in your home has grown from 10% to 40%. You could borrow 20% of your home's value (home equity lenders typically require 20% equity to remain). A common use is to upgrade or do large capital projects on the home, like paying for a new roof or remodeling the kitchen. But people can also use the money to buy a rental property, fund a new business, buy a car, etc. too.
Not sure what your dad's comment about insurance and equity have to do with each other, so either you misunderstood what he was complaining about or he doesn't understand something.
> Not sure what your dad's comment about insurance and equity have to do with each other, so either you misunderstood what he was complaining about or he doesn't understand something.
The escrow could have increased, so if they pay extra every month then the amount they pay extra would be less (unless they maintain the amount of extra payment).
The easiest way to think of equity is as market value - debt. In accounting ,
>Assets = Liabilities + Owner's Equity (OE)
If your home is the asset, then the liabilities are the liens (which I'll simplify to just mortgages) and the owner's equity, which balances the accounting identity. You can think or Owner's Equity as the business owing the owner.
An implication is that OE can be negative. For example, if the Market Value on the asset (the home) is less than the mortgages, then the owner's equity balances the equation. If owners try to sell a home that they're "upside down" or "underwater" on, then the owners would have to take money out of their pockets. If owners are underwater enough (have too much negative equity), they might consider "mailing back the keys" to the mortgage holder.
When you go to buy a home you probably don't have $300,000 lying around. So you get a loan. A special kind of loan for homes, called a mortgage. The bank gives you the $300,000 and you pay it back + interest over the next 15 or 30 years.
The $300,000 is called your principal. And it's supposed to be a close approximation to the value of your home (after all, that's what it cost you to buy it). As you make payments back to the bank you pay off the interest but you also pay down some of the principal. So let's say after a few years you've paid off $50,000 of the principal. That means you now own a $300,000 home, but still owe the bank $250,000 + interest. This means if you sell your home right now, you'd get $300,000. You would use that to pay off the $250,000 you still owe, and you'd be left with $50,000.
"Equity" is the term we use for how much of your house you've paid off. Or how much you would make if you were to sell it. So in this situation if you've paid off $50,000 of the principal, then you've got $50,000 in equity.
Most people have covered the equity part, but not the "buying things with equity" part.
Equity is how much your home is valued at minus how much you still owe for it. Once you reach a certain amount of equity, or certain amount of house you own vs the bank owns, the bank is then willing to loan you money against that equity (Home Equity Line of Credit or HELOC). These types of loans tend to have a significantly lower interest rate than traditional loans. The other thing you can do is leverage the equity in your house towards a second mortgage on a seperate property. This let's you have a second rental property or similar, again, at often a lower interest rate.
Equity is the value of your home. For most people, that means the amount of money they could potentially get by either selling their house or using it as collateral for a loan.
Say you take out a mortgage or home loan for $500,000
After ten years you have paid off $100,000 of that mortgage loan.
You now have $100,000 in equity. It’s essentially monies paid back versus your loan.
I think..
It is the value of the home minus how much you owe on the home. When you buy it, your equity in the home is essentially your down payment. You increase equity by two means:
#1) Pay down your mortgage
#2) The value of the home increases
You can actually have negative equity if you purchase a home at the top of the market. When the market falls you may owe more on your home than it is worth (happened a lot around 2008).
Insurance has nothing to do with equity, so you or your father misunderstood what was going on here. I do not believe a mortgage lender can require PMI (private mortgage insurance) after escrow closes and your equity falls below 20%. It is possible if the home value went down and your father tried to refinance they would require PMI if his equity dropped below 20%.
MyNamesArise t1_je3blae wrote
It’s just how much of the home you actually own, as opposed to the total value. You can find this by taking the home value and subtracting the total mortgage outstanding