Real Estate Vocabulary 101: Equity

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What is equity?

Equity in real estate is the total value of a property less what is owed on the property.  The more equity the more you personally have as an investment into the property – whether it is your personal home or a property you have invested in as an additional source of income.

If that explanation is clear as mud, here is a visual that hopefully will help you put it all together.  As a visual person myself, I need to see the examples to put it all together.

Ex. – your personal home is worth $100,000 and you currently have a loan on your home totaling $70,000 giving you a total equity of $30,000 in your home.

 $100,000 – Value of Home

 – $70,000 – Value of Loan

   $30,000 – Total Equity in Home

How can I build equity into my home or investments?

  • put a down payment – or larger than required down payment – on a mortgage to purchase a property (see the Real Estate Vocabulary 101: Down Payment blog for more details about a down payment)
  • purchase a property for below its market value
  • pay down your mortgage more quickly
  • or combine any of these options together for even more potential equity building

Examples…

Bullet #1 –

 $100,000 – Value of Home = Purchase Price

 – $70,000 – Value of Loan

   $30,000 – Down Payment on the Loan = Total Equity

Bullet #2 –

$100,000 – Value of Home

 – $85,000 – Purchase Price

   $15,000 – Total Equity in Home

Bullet #3 –

$100,000 – Value of Home

 – $70,000 – Value of Loan (lowers with each payment)

   $30,000 – Total Equity in Home (increases with each loan payment made)

Bullet #4 –

$100,000 – Value of Home

 – $60,000 – Value of Loan (lower loan value due to lower purchase price)

   $40,000 – Total Equity in Home


Another method is purchasing a home at or below its current value, then adding value to it by updating, expanding or even possibly changing the use of the property.  This is a very strategic form of investing whether you are doing it for additional income or if you are looking to build worth into your own home or business.  ALWAYS DO YOUR DUE DILIGENCE!


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