Equity Question (from beginner)

4 Replies

Hello, this would sound very immature. I'm new at this, please bear with me.

I'm not quite getting the home equity concept, can someone define it in simple terms?

@Elijah Artman 

Market Value - Amount owed = Equity

Welcome to BP! Beginner's Guide to Investing should help you with a lot of the basics. Also, listen to some of the Podcasts

Hats off to you for posting a question on something you needed help with. Everyone started someplace, and if you don't ask questions, you will never learn the answers. It's not immature at all, it's being humble. One of the things I tell newbies is: Know what you know, and what you don't know, find someone that does, and ask! 

Have fun, and see you around the forums. Let me know if there's any other questions I can help you with. 

No worries, Elijah. Think of it this way: If you own a home that can be sold for 100k  and you don't have any mortgages or loans secured by the property then you have 100k in equity, or 100% equity,  in that house. If you have a mortgage balance of 50k on that house, your equity is reduced to 50% (50k)

So when you hear someone say "I can get a home equity loan for 80% LTV (loan to value) that means a bank is willing to let them borrow, in total, up to 80% of the value of the house. So in scenario #1 (100k equity) they could borrow 80k. In scenario #2 (50k equity) they could borrow an additional 30k -- they have aleady borrowed 50k with the the mortgage)

I hope this answers your question.

@Elijah Artman  

 I did this so that you'd be notified you were mentioned. I had already posted the one above and when you come back and put the @mention, it doesn't always work.

Note: If you want to @mention someone that's in the post, you can @typetheirname and it comes up in drop down menu, click on their name and it will be highlighted in the post as yours is here. If it doesn't drop down, type @? and everyone in the post will be brought up.

Home equity is simple the amount of cash you would receive if you sold your home.  Very basic example:

You buy a house for $100,000.  There are several ways to finance the purchase:

1. You pay all cash.  In this event, your home equity is $100,000.  If you sold your home right now for $100,000 you would receive $100,000 (not counting the costs associated with selling).

2. You borrow money to finance part of the purchase.  Say you borrow 80% ($80,000) from your local bank.  You then need to come up with the rest of the "down payment" or $20,000.  Now if you sell the property for $100,000, you have to pay back the $80,000 and then you get to keep $20,000 in cash; your home equity.

In both scenarios, if your house appreciates to $150,000, then your home equity increases by the same amount (increases by $50,000).  The difference between the two scenarios is that in #2, as you pay down the mortgage, you further increase your home equity position.

God Bless You!

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you