EQUITY AND PROPERTY VALUE

How much will you get after the sale of your property? The answer depends on your house’s equity. There are a few considerations to factor in when it comes to understanding your home’s equity. To better understand how this works, let’s break it down.

WHAT IS EQUITY?

In general terms, equity is the difference between the value of your home and the debt you still owe on it: Equity = Home Value - Debt. Hopefully this is a positive number. However, equity is not necessarily your profit.

To understand equity better, let’s say your home is valued at $200,000 and you owe $120,000 on its mortgage. Your home’s gross equity is $80,000. You can build equity as you pay down the mortgage over time. In turn, it may further increase as the property’s value increases. To dive a little deeper, let’s take a look at net equity vs. gross equity.

Gross vs Net

These terms are actually quite different from one another. There’s more to it than just the mortgage. Net equity is your gross equity minus the cost of selling the home. Some of the costs of selling a home include commission fees, property taxes, title charges and closing costs. Take note that the price you paid for the property is most likely different than its current value, depending on appreciation or depreciation.

From our previous example of $80,000 gross equity, let’s factor in the additional fees discussed. Assuming that all of those fees amount to $10,000, your net equity is now reduced to $70,000. Net equity is the amount you get to keep in your pocket at the end of the sale, after all fees, debts and costs are deducted.

HOW DOES THIS AFFECT VALUE?

To understand this better, let’s take another example. Let’s say you originally bought your home for $150,000. This includes a down payment of $35,000 and a mortgage of $115,000. So, you started with gross equity of $35,000. When you go to sell your home, you find property values have gone up in your area. Through a comparative market analysis, your home is now worth $180,000. This now makes your gross equity $65,000.

HOW COULD I HAVE NEGATIVE EQUITY?

When property values fall, so does the equity. If you’re selling in a down market, especially during a housing crisis, like we went through a decade ago, you may see very little, or even negative equity. Using the previous example, if you originally bought your home for $150,000, and put down $35,000, you started with $35,000 gross equity. When you go to sell, you find home values have decreased, and your home’s current value is $115,000. At this time you have zero equity, or just the amount you’ve paid down the mortgage. The net to you at closing will be affected by how much of the mortgage balance you still owe, and any fees and closing costs.

Another way your equity is reduced is by increasing principal loans on your property by taking out a second mortgage, or home equity line of credit.

HOW DO I BUILD MY EQUITY?

Home improvements

When you make improvements to your home, its fair market value increases. While completing updates, and upgrades will increase your home’s value, it’s important to understand the limits. The kitchen is one household area which attracts potential buyers. Spending $20,000 on kitchen upgrades may only give you a return of $15,000 in added value, or less. Knowing the added value of previous updates, and those you’re contemplating, will give you an idea of the gross equity in your house. You’ll want to make your decision on what repairs, or updates to complete, based on the cost versus benefit of increased home value. 

Settling your mortgage

Paying down your mortgage principal balance will help increase your equity. Every mortgage payment counts. Each payment you make chips away at the principal balance you owe. To keep it simple, the lower your debt, the better chance of increasing your home equity.

• On a side note, equity can also increase through real estate appreciation. This isn’t entirely controlled by the homeowner themselves but through the comparable sales in the area. Unless there’s a market crisis, your equity can steadily increase, as property values go up.

Knowing your home’s equity will help you understand how much profit you will get after the sale of your house. Understanding your net equity will help you keep track of your actual profits, whether you are selling an investment house, or your private home. Understanding your net equity plays a part in your overall financial portfolio. You don’t want to be surprised at closing, thinking you were getting more money back.