How Does The Equity Work?
Posted by @TopMortgageRate
A home equity loan or line of credit allows you to borrow money using your home's equity as collateral.
Wait. Don't click to another page. If the above paragraph seems like gibberish, you have surfed to the right place. We will explain:
Collateral is property that you pledge as a guarantee that you will repay a debt. If you don't repay the debt, the lender can take your collateral and sell it to get its money back. With a home equity loan or line of credit, you pledge your home as collateral. You can lose the home and be forced to move out if you don't repay the debt.
Equity is the difference between how much the home is worth and how much you owe on the mortgage (or mortgages, if you have a home equity loan or line of credit).
Example 1Let's say you buy a house for $200,000. You make a down payment of $20,000 and borrow $180,000. The day you buy the house, your equity is the same as the down payment ($20,000):$200,000 (home's purchase price) - $180,000 (amount owed) = $20,000 (equity)
Fast forward 5 years.
You have been making your monthly payments faithfully and have paid down $13,000 of the mortgage debt, so you owe $167,000. During the same time, the value of the house has increased. Now it is worth $300,000. Your equity is $133,000:
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