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Understanding Home Equity and What it Means to Homeowners

Home equity is a buzzword in the real estate world. It is the difference between the market value of your property and the amount of money you still owe on the mortgage for starters. As a property owner, it is a must that you have an idea of how this works, as you can use it to your advantage down the line (such as getting a home equity loan).

Home equity can be affected by many different factors. Normally, it appreciates or rises due to many different economic activities. But there will be a few instances where its value goes down. Knowing these factors will help you maximize your plan to use your home equity. For instance, you will be able to determine the right time for applying for a loan. Below is a rundown of important items you need to know about home equity and the factors that affect its value. New buyers who are applying for home loans may also benefit from this information:

Factors That Cause Home Equity to Go Down

The common principle in real estate industry is that home, or real estate property value does not usually go down. Nevertheless, some situations cause negative changes. For instance, if a property is situated in a location or neighborhood that is far from prime amenities and facilities, its value may not be attractive enough. The same case may apply to homes in neighborhoods with high crime rates.

The look and condition of the home may also cause the equity to go down. Rundown, old, and homes that are not properly maintained tend to have lower price tags. Concerns related to supply and demand may also negatively affect home equity. For one, if the supply of homes in a specific community or neighborhood goes beyond the demand, it naturally follows that the prices will also drop.

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Factors that Cause Home Equity to Go Up

You may ask, “If home equity can go down, then it can also go up, right?”

That’s correct. A homeowner can increase the market value of the property by making improvements and adding useful features. In this case, however, you need to be careful. The home’s design should not be overly specific (such as a Harry Potter or Star Wars-themed home), as you may find it hard to resell it a higher value.

Your payment terms will also help increase home equity. Some loans have monthly payments that are composed of higher interest payment and lower principal payment. Because you are paying a lower principal, the equity builds slowly. To combat this, you may want to make additional payments in a month that goes directly to the equity.

It would also be wise to shorten your loan term (turning the 30-year loan into 15-year term). This will help build your equity much more easily and steadily. Moreover, you will be able to pay a much lower interest. Making a big down payment is also a great strategy.

The Right Way of Using Home Equity

You may not realize it, but you can use your home equity to your advantage. For one, you can tap into it if you want to resell your home. The proceeds can even be used to buy a new home. Those that are considering retirement may want to explore reverse mortgage. Those 62 and older who have already paid off their mortgage may receive money based on their home’s equity.

Final Thoughts

Home equity is one basic real estate concept that you must understand, as you can use it to your advantage. If you want to learn more about it, talk to a reliable real estate broker or agent.

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