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HOME EQUITY

Written by Alex Nkrumah


What is Home Equity?

Home equity is the market value of a homeowner’s unencumbered interest in his or her home. The homeowner’s interest is the leftover value after reducing market value of the home by all outstanding liens at a specific time (note 1).


The market value of a home being purchased is best determined by a certified appraiser. However, a good Comparative Market Analysis (CMA) by a Realtor or Real Estate Agent will suffice in most other cases in establishing the Market Value at that time.


The encumbrances against the property are mortgages and other liens, such as a tax lien. By the definition above the equity is therefore the remaining balance after deducting all encumbrances from the market value of the home.

Amortized mortgage payments include a part of principle repayment over the term of mortgage. For a 30-year fixed mortgage at 6% for instance, the mortgage lien will be completely wiped out by the last payment on the mortgage because the amortization process returns part of the principal amount back to the lender at each scheduled payment. This “repaid” part of the mortgage lien is added to the home owner’s equity in the property.



The rest of Home owner’s equity is due to the appreciation in value of the home (property) over time due to the market or repayment of other encumbrance(s) on the property.

The home equity increases directly proportionally to home market value, all other things remaining unchanged. The reverse holds true also.

Who should be concerned of this article?

1). Renters,

2). People in process or planning to purchase their first homes,

3). Homeowners who experienced the last recession without taking action to cash out their equity by selling and purchasing (another home), especially if you are still paying Mortgage Insurance Premium(FHA mortgages) or Private Mortgage Insurance (Conventional mortgages)

4). Where refinancing is restrictive or costly for the intended purpose, such as a consolidation loan (i.e., a higher new interest rate by 1% and lower LTV to 85 or 80%).

Areas affected by this article

This article is written for the real estate markets in the New York metropolitan and surrounding areas and some parts of the country where property prices are going up at this time.


Timing

It is now a great time to act. The market is still upward in parts of the country. Consult with your Real Estate Salesperson for your market statistics or contact us for free market statistics.


Why do you need to be concerned?

Accumulation of Home Equity is great because it grows your net worth in an upwardly trending market and can be reduced or lost altogether in a downward market except for markets that remain robust through a period of recession as seen in Flushing, New York in the recession from December 2007 to June 2009.


1) Home Equity is a sure way to save great amounts of money for retirement fast. Value of savings depends on growth in your home market.


2) Home Equity of 20 percent or more eliminates the risk of Mortgage Insurance premium and therefore reduces home financing cost.


3) Equity can be cashed out and diversified into other safe investments or cash used for other purposes.


4) A mortgagor (home owner with mortgage) with enough equity in home can qualify for a reverse mortgage under certain conditions and be allowed to live in the home without mortgage payments for some future period. The remaining liability is deferred until a life event occurs or owner satisfies the contract.

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