Home Buying 101 - Part One: Understanding Equity

Posted by Katie Langthorn on Wednesday, January 4th, 2017 at 4:09pm.

 

Welcome to my new blog series, Home Buying 101! I will be detailing the various parts of the transaction process for purchasing a single family home.  My goal is to answer the many questions looming around purchasing, especially for first-time home buyers.

 

There are a lot of words thrown around when discussing purchasing property.  One of the most confusing concepts for first-time home buyers is equity.  It’s not a dirty word, I swear. 

 Equity in real estate is defined as the difference between the market value of your property and what you owe to the lender for the mortgage.  For example, let’s say the market value of your home is $150,000 and you owe the lender $120,000; that makes your equity $30,0000.  Sometimes equity is expressed as a percentage, in this case it would be 20% equity.


There are several ways you can build home equity:

-       Down Payment: Which is the initial investment monies put into your home to reduce the mortgage payment.  Using the example from above, a down payment of 20% (to avoid PMI) on a $150,000 home is $30,000.  The lending amount is the price of the home minus the down payment, which is $120,000.

-       Mortgage Payments: As you make regularly scheduled payments to your mortgage, the amount owed to the lender decreases.  Assuming the market value of your home stays the same, the difference between it and the lending amount will grow larger, thereby increasing your home equity.

-       Extra payment on Mortgage Principal: Similar to making regularly scheduled payments, if you pay additional monies towards the loan principal, the loan amount goes down which increases the amount of equity.

-       Home Improvements: Renovations or upgrading finishes to your home increases the market value of your home!  An example would be if you removed the carpet in your home and installed laminate flooring instead.  By doing so, the value of your home has increased, which raises the difference between it and what you owe the lender, which increases your home equity.

-       Market Value Appreciation: When similar houses around yours sell for a higher price, that raises the value of your home.  Again, raising the market value of your home increases the difference between it and your loan amount which in turn raises your home equity.

Conversely, there are ways that home equity can decrease:

-       Principal Loan Amounts Increase: Some ways that the principal loan amount increases are if you refinance your mortgage, take out a second mortgage or home equity loan.  Because you would be narrowing the difference between the loan amount and the market value of your home, it would be reducing the amount of equity.

-       Market Value Depreciates: Opposite to the example above, if similar homes around your house is selling for a lower price, then your equity has decreased.  Let’s use the example from above – you bought your house for $150,000 with a 20% down payment (equity) of $30,000.  Now similar houses to yours in your neighborhood are selling for $115,000.  You no longer have equity in your home because your equity has dropped by $35,000.  If you sold your house at this new market value of $115,000 while owing $120,000, you would have to pay the lender $5,000 to make up the difference.

-       Home Destroyed by Disaster: Heaven forbid your home encounters a disaster – a fire, hail storm, tornado, or flooding.  If you don’t have enough insurance money to pay for the repairs, you will probably need to get another loan.  This would add to your existing principal loan amount, further decreasing the difference between it and the market value of your home, which lowers your home equity.

-       Maintenance Delayed: Keeping your home well-maintained is important to be sure things do not stop working appropriately.  If you don’t take care of the needed repairs, the cost to fix them will grow larger and take away from the equity in your home.

 

Why is equity important? Take a look at Part Two: Renting vs. Buying!

 

Source: https://www.thebalance.com/definition-of-equity-1798546

 


Texas Real Estate Commission Consumer Protection Notice

____________________________________________________

Katie Langthorn  |  Real Estate Agent, REALTOR® 

C: 281.850.7743  |  O: 979.703.1979  |  F: 979.703.1980

3091 University Dr. E. #230  |  Bryan, Texas 77802

www.TM5Properties.com  |   www.facebook.com/katielangthornrealtor

Your Source for Bryan/College Station Real Estate

12 Responses to "Home Buying 101 - Part One: Understanding Equity"

Home Buying 101 - Part Two: Renting vs. Buying wrote: [...]especially for first-time home buyers. If you are just beginning, I recommend starting with Part One: Understanding Equity.
 
In 2015, 32% of all home buyers were first-time buyers, with a median income of $69,400.[...]

Posted on Wednesday, January 4th, 2017 at 7:57pm.

January 2017 Newsletter wrote: [...]owners are raising the equity in their home, without doing anything but living in it! 
Remember, equity is the difference between your home’s value and what you owe to your lender.  In the last 7[...]

Posted on Thursday, January 12th, 2017 at 12:00pm.

Home Buying 101 - Part Three: What's a REALTOR®? wrote: [...]especially for first-time home buyers. If you are just beginning, I recommend starting with Part One: Understanding Equity.
 
  
In 2015, 88% of home buyers decided to use a REALTOR®; and those numbers are up from[...]

Posted on Sunday, January 15th, 2017 at 6:53pm.

Home Buying 101 - Part Four: Meet with a REALTOR® wrote: [...]especially for first-time home buyers. If you are just beginning, I recommend starting with Part One: Understanding Equity.
 
 
Previously I detailed what a REALTOR® is.  Keeping all of that information in mind, I[...]

Posted on Sunday, January 15th, 2017 at 7:07pm.

Home Buying 101 - Part Five: Lending Basics, a Q&A wrote: [...]especially for first-time home buyers. If you are just beginning, I recommend starting with Part One: Understanding Equity.

I have asked Jordan Monroe, of Legacy Mutual Mortgage, to help answer some common questions[...]

Posted on Monday, January 30th, 2017 at 12:46pm.

Home Buying 101, Part Six: The Fun Part wrote: [...]especially for first-time home buyers. If you are just beginning, I recommend starting with Part One: Understanding Equity.
 
 
 
Hopefully when we’ve met for the first time, we have also been able to chat enough[...]

Posted on Wednesday, February 8th, 2017 at 11:56am.

Home Buying 101 - Part Seven: Making an Offer wrote: [...]especially for first-time home buyers. If you are just beginning, I recommend starting with Part One: Understanding Equity.
 
At this point we've seen houses and whether it's the first or the tenth you have found the[...]

Posted on Thursday, February 23rd, 2017 at 9:09pm.

Home Buying 101 - Part Eight: Congratulations! wrote: [...]especially for first-time home buyers. If you are just beginning, I recommend starting with Part One: Understanding Equity.
 
 
At this point we have submitted an offer on the house you & your family love, and God[...]

Posted on Friday, March 3rd, 2017 at 4:23pm.

April 2017 Market Update wrote: [...]to closing.

Ready to purchase but not sure where to start?  Give it a shot with my blog series, Home Buying 101.  
Considering selling your home?  Call me on my cell phone (281) 850-7743 to schedule a no[...]

Posted on Monday, April 10th, 2017 at 7:10pm.

Bryan/College Station Values on the Rise wrote: [...]for a full down payment on your next purchase – you can read more about affecting your equity in this post.   
 
Not only are our market values increasing, we are also in the hottest part of our[...]

Posted on Tuesday, May 2nd, 2017 at 5:05pm.

College Station Home Values Have Appreciated wrote: [...]
In a previous blog post, we talked about equity, which is the difference between the current market value of your property[...]

Posted on Friday, May 12th, 2017 at 4:12am.

Why Katie & TM5 Properties? wrote: [...]
Your Source for Bryan/College Station Real Estate


Related Links

Home Buying 101: Part One - Understanding Equity
Home Buying 101: Part Seven - Making an Offer




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Posted on Monday, October 16th, 2017 at 11:45am.

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