Definition
Home Equity
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Home equity refers to the value of a property after deducting any outstanding housing loans against it.
Many homeowners don’t realise that when in order to cash out on home equity, that there must be sufficient equity in the house to begin with.
They get informed that as long as their homes are valuable, that they would be able to get a term loan against the property.
However, that is not the case.
For example, if a house is valued at $800,000 with an outstanding mortgage of $600,000, a homeowner will not be able to get a home equity loan even at 75% LTV. This is because 75% of $800,000 is $600,000 which is the balance on the home loan.
In order to be eligible for a such a loan, the amount after accounting for LTV must be higher than the outstanding balance of $600,000.
Home equity is generally increased via two methods:
- Appreciation in property value
- Reduction in outstanding loan
This implies that the more time that goes by, the more the equity would grow, raising the chances of a homeowner getting some type of credit facility from the bank with home equity.
This is because the more time passes, the more likely a house will appreciate in value. And the more repayments will have been made towards the mortgage.
Using equity to purchase new property for investment is a dangerous game to play.
So do consider things from every angle before making such a move.
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