When you're looking into your financial options you will likely come across the concept of equity rather frequently. In order to have a solid grasp on what the possibilities are for your real estate, you should learn what this term means and how you can use it. This article will explore the concept of equity and how it pertains to your home so that you can use it to your financial advantage in the future.
Equity, when used in finance circles, means the amount of money your assets are worth once you take into account any debts that are drawn against them, which is known as liability (see definition here). You can also think of it as net worth. If you have stocks or a share in a business, your equity is the amount of money you would get, cash in hand, if you liquidated (see definition here) it all to fund your home renovations for example. It is possible to have negative equity if you are "in the red," which means that your operating costs or debts exceed what your assets are worth.
When you see the word "equity" in the context of owning real estate, it means the amount of money you could get for your property less what you would have to spend to settle the remainder of your mortgage debt. You can think of equity in simple terms as the amount of money you have paid off on your mortgage, but in fact equity is more complex than that. Because equity is based on the market value of the home, so the equity on your property may increase or decrease according to whether the home values in your area are doing well or not, even if you haven't paid off any more of your loan.
The reason you so often see the word equity used in real estate circles is that banks often encourage clients to borrow against their equity. Mortgages for self employed people, for instance, may allow clients to borrow back some of the money they have already paid off against their mortgage if they fall on hard times. This is what is known as using the equity in your home. You can only use equity if you have some to borrow against, so it will generally take several years for you to build any up.
You should be careful when borrowing against the equity in your home. Though it may seem like free money, you're actually just lengthening the amount of time it will take to pay off your home or condo and increasing the amount you have paid in interest over the course of the loan. Always go over different options with a mortgage broker or bank, talk to any financial advice friends you may have and even discuss possibilities with your real estate agent. For example, most real estate agents will state that they encourage each of their clients to research all options before signing any contract and to always read the fine print to prevent future headaches.