What is Home Equity?

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. 

1. You buy a house for $100,000.
2. You put down a down payment of $10,000.
3. Therefore, your mortgage balance is $90,000.
4. 5 years later, because you have been making regular payments, your mortgage balance will be $85,000.
5. 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.

$150,000

-$85,000

$65,000

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.

What is a Mortgage?

Let’s start from the very beginning.  What is a Mortgage?  Some people may feel that this is a silly, easy question – a mortgage is a big sum of money that the bank gives you so that you can buy a house, right?  Wrong.  In order to understand why a bank would help you buy a house (what's in it for them?), one must first understand the real definition of a mortgage.

Mortgage: a (written) promise that is given by the borrower (you) TO the lender (the bank) stating that you owe the bank money.

(From here on in, for ease of explanation, I will assume that you=borrower and the bank=lender)

When you buy a house, your mortgage is registered in the Land Title Office (an office that keeps track of who owns all the properties in the area).  This registration transfers “ownership” of your house to the bank so that the bank has security for the money that you owe them.

What does this all mean?  When you buy a house using money obtained from a bank, you do not actually “own” this house – the house is actually the property of the bank.  So to answer the question above about why a bank would want to help you buy a house (apart from the money that they will make off of interest) – the banks feel secure in lending you this money because if you ever break your promise to pay back the debt, the house is already registered in their name and is theirs to sell in order to gain back the money owed.

A somewhat comparable example: 

Your little sister asks to borrow your video camera worth $500. 

You’re not sure how reliable and responsible she will be because there’s a chance she will be partying. 

You ask her to give you a promise and collateral (ie. a mortgage). 

She lets you hold onto her diamond engagement ring worth $1000 until she brings back the video camera in good condition.

If she ruins your video camera, you can keep the diamond engagement ring.  If you wish to sell the engagement ring, you can, and this money can be used to buy a new video camera.

Easy stuff, right?

What the heck is this blog about?

We’ve all heard it time and time before: “I’m just no good at math” and “numbers don’t make sense to me”.  Frankly, I am just as guilty as the next person for admitting these things aloud.  I vividly recall an instance where I was in a meeting sitting around a table full of women and we were all laughing about not being able to come up with the answer to a simple equation (“What’s 30% off of $2000.00?”).  Around the table I heard remarks such as, “math just isn't my strongest subject”, and, “I’m so stupid when it comes to calculations”, followed by a sea of approving nods and the overwhelming consensus that this is the reason why we were in our current professions.  I even chimed in with this statement: "I've always been bad at math - that's why I was an arts student in university".  At that moment, it dawned on me that the dismissal of being unable to calculate numbers is a collective acceptance that has penetrated deep within our culture.  It is socially acceptable to claim that we are afraid of numbers and are bad at math.

I’m sure you’re wondering…is this blog about math?  The answer is…not really.  I know, I know, I just spent my entire opening paragraph talking about math and numbers.  However, it was all to provide a bit of background as to where I’m heading, which is this:  If you have the capability to know something, why not try?  Not knowing one thing can close so many doors to knowing other things.  Accepting ignorance is not a good enough excuse when that energy could be put to arming oneself with knowledge.

My name is Jennifer Loh and I am formerly what one would call “a literary type”.  These are the folks who hide their noses in old books and profess to know everything – except numbers.  I have a Bachelor of Arts degree in English Literature and a Certificate in Liberal Arts from Simon Fraser University.  Previously, I taught English as a Second Language, tutored in English Literature, and worked in media sales in the publishing industry.   I was 26 years old when I realized that I had never really tried to get acquainted with numbers, let alone get intimate with them, and that this fear had kept me from learning about so many other important things in this world.  I was also 26 years old when I realized that this fear of numbers had kept me from knowing about two of the most vital subjects of our modern society: home buying and residential mortgages.  

The world of mortgages had always had a wall of numbers surrounding it that kept me from entering.  You might be thinking - "why would she associate mortgages with numbers"?  The answer is quite simple - I knew that the mortgage world was tied to the finance world and in my mind, finance=math. It’s not that I didn’t want to know what a mortgage was, what was involved in purchasing a house and obtaining a mortgage, or how to make money from this type of investment.  The problem was that every time I tried to read about or listen in on conversations about these subjects, a word would be thrown in that I didn’t fully comprehend and then the rest of the conversation was indecipherable.  I automatically attributed this to my lack of knowledge of math and finance. I was not the kind to admit that I didn’t understand (remember: former literary type that knew everything) because the words seemed so commonplace.  After all, they were used in thousands of newspaper articles and in everyday conversations around the office.  Eventually, I think I gave up trying to understand.  Every time I watched or listened to the news and information about the housing market, mortgages, or finance came on, I immediately changed the channel, zoned out, or glazed over.  The words “home ownership”, “mortgage”, “interest rates”, “equity”, and “lending” meant nothing to me because they had no context.  Sound like you?  You’re not alone.

As I was saying above, my new life began at 26.  This is when I decided that I was tired of not knowing about something that affects nearly every person in our society who has a home – regardless of whether they rent or own.  I was stuck in a profession that I didn’t enjoy and the idea of finding a new career sounded enticing.  One of my best friends was (and still is) a mortgage broker and she seemed to be content. When my partner, Brad, saw this, he recommended that I look into this industry.  As you can guess, I initially laughed and scoffed at the idea.  After all, I hadn’t done a mathematical calculation for years (unless there was a calculator handy)!  However, I began to think about it later and came to the very realizations about math, my fear of numbers, and my acceptance of ignorance that I illustrated above.  It was time to stop accepting my lack of knowledge and lack of confidence and turn the tables.

This blog is meant for any and all people who have ever felt even a small taste of what I’ve felt in the past about numbers, math, mortgages, housing, accepting ignorance and gaining knowledge.  Herein lies the premise of my blog: “Mortgages, Math & More for the Literary Types”.  I firmly believe that I am not the only person out there who needed/needs to start the education process from the very beginning and I pledge to do just that.

Oh, and I stated that my new life began at 26…did I mention that I’m only currently 27?  That’s right…we’re on this journey together.

My name is Jennifer Loh and I am a Mortgage Broker serving the Lower Mainland and Fraser Valley.  I will gladly explain everything about mortgages to you in plain English.