What Does it Mean to Have Equity?

by Mike Parker, Demand Media
    Your home may be both your greatest liability and your largest source of equity.

    Your home may be both your greatest liability and your largest source of equity.

    Equity means ownership. Your equity in your home is the difference between what you owe on your home and what your home is worth on the open market. Having equity is important because provides a stable base from which to grow your finances, and it gives you a resource to draw on if you need to borrow money.

    Home Equity

    Your home is one of the largest purchases you are ever likely to make. Chances are you are not able to buy a home outright, so you'll typically take out a mortgage loan. Lenders require buyers to place a down payment on the home. The amount you put down on your home becomes your initial equity in the home. Your home equity is the amount of the home that you actually "own." The rest of your home essentially belongs to the lender.

    Increasing Your Equity

    The amount of equity you have in your home can change over time. Your mortgage payments include both interest and principal. As you make your regular payments you pay down your mortgage loan and increase your equity in your home. You can increase the equity in your home by making certain improvements, such as adding a room or upgrading the central heat and air conditioning system.

    How Market Conditions Affect Your Equity

    Market conditions may cause the value of your home to increase, which will result in an equivalent increase in your equity. Historically, home prices have increased an average of five percent per year, according to LendingTree.com. Historical performance doesn't always translate in to current reality. Recent conditions have seen many homes decrease in market value, resulting in a commensurate reduction in home equity.

    Equity Loans

    You can use the equity in your home as collateral for a loan, called a "home equity loan." The interest on a home equity loan is usually tax deductible. Since the loan is backed by your home, you can typically get a much lower interest rate than is available on most consumer loans. Use caution when considering a home equity loan. If you default on this type of loan, the lender can foreclose on your home.

    About the Author

    Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.

    Photo Credits

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