I’m sure you’ve heard words similar to these in advertisements: “Use your equity to pay down your debt” or “Let your home equity lend a hand”. What is this equity that all these lenders speak of? There are a few different definitions for equity but the one definition that is most important to you is that of HOME EQUITY.
Simply put, home equity is the difference between your home’s market value or purchase price and your mortgage balance.
In other words, HOME EQUITY = MARKET VALUE or PURCHASE PRICE – MORTGAGE BALANCE
Let’s go through a fairly easy example.
- You buy a house for $100,000.
- You put down a down payment of $10,000.
- Therefore, your mortgage balance is $90,000.
- 5 years later, because you have been making regular payments, your mortgage balance will be $85,000.
- Also 5 years later, because your neighbourhood has become a desirable place to live and property values have gone up, the value of your house has gone up to $150,000.
ie. 5 years later, your home equity amount is $65,000!
Building up equity should be the #1 goal for homeowners. The more your property value increases and the faster you pay down your mortgage balance, the more equity you have!
Home Equity can be used as collateral to borrow money from the bank (perhaps for renovations or to consolidate debt). This is often done through home equity loans or home equity lines of credit, which I will explain further at a later time.