Equity
In simple terms, equity refers to the difference between your total assets and your liabilities. Specifically, in real estate, equity is the difference between the current market value of your property and the remaining balance on your mortgage.
Home equity can be accessed through borrowing, which creates an additional loan alongside your existing mortgage. There are two common types of loans available for accessing home equity: a Home Equity Loan and a Home Equity Line of Credit (HELOC).
- Home Equity Loan: This loan allows you to receive the entire amount of the loan in a lump sum upfront.
- HELOC: This option provides you with a credit line that you can draw from as needed, similar to a credit card.
Borrowers often utilize these options to finance large expenses, such as home renovations, medical bills, or other significant costs, by leveraging the equity they have built in their property.
It’s important to be aware of the risk of negative equity. This occurs when the remaining balance on your mortgage exceeds the current market value of your home. Factors such as market fluctuations, depreciation, or economic downturns can contribute to negative equity. This situation can limit your borrowing options, as you cannot borrow against negative equity.
