One of the perks of owning property is that it builds up equity. Equity is the difference between the amount you owe on your property and how much that property is worth. You can use equity to secure loans or lines of credit. Although you most often hear about equity in reference to owning a home, anything you own can have equity, including cars, boats and other property.
To have equity, the value of your property must be worth more than what you currently owe.
Determining Your Equity
To determine the equity of something you own, such as your home, you need to know the value. For a home, you can use property tax assessments or have an appraiser evaluate your home. Then you subtract the balance of your mortgage from the value of the home. If your home is appraised for $150,000, for example, and you owe $75,000 on your mortgage, then you have $75,000 in equity in your home.
There are situations where you have negative equity. If you bought your home and then its value dropped, you may owe more than the home is worth. If your home is valued at $150,000 and your mortgage has a balance of $160,000, then you have $10,000 in negative equity. Cars, in particular, tend to have negative equity, which is also referred to as being "upside down." This is because cars depreciate. If you owe $10,000 on your car but the car would only sell for $6,000, this means you have $4,000 in negative equity.
Using Your Equity
You can use equity to secure financing for things that you need. In the case of home equity, you may be able to qualify for a home equity loan or line of credit. A home equity loan provides you with a set amount of money that you pay back at a fixed rate. Home equity loans are for larger amounts and are often used for consolidating debt or home renovations. A home equity line of credit provides you with a credit line. You can use as much as you need up to the limit.
If you have equity in a car, you can use that equity to secure a loan. To do this, you would refinance the car for the amount the car is worth and then pay off your previous loan. You could use the balance for things like paying off high-interest credit cards or other unexpected expenses.
Drawbacks to Using Your Equity
Home equity loans and home equity lines of credit are secured by your home. If you fail to pay back the loan or line of credit, your house can be foreclosed on by the lender. If you sell your home, you will need to pay off the loan or line of credit before the title can be transferred. Both types of financing can also have long repayment periods.
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- Understanding Home Equity
- How to Refinance Paid for Property & Cash Out Equity
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- How to Calculate Equity to Remove PMI