What is equity?
Equity is the interest or value that the owner of a property has in that property over and above any liens against it.
A mortgagor’s equity in property encumbered with a long-term mortgage increases with each monthly principal mortgage payment and increasing value through appreciation.
It builds up gradually in the early years of the mortgage, as most of the monthly payment is applied to the interest on the loan rather than to the principal.
The difference between what a borrower owes on their loan and the market value of a property is the property owner’s equity.
Is there such a thing as negative equity?
Yes, whenever a person owes more on their loan than the value of the property, it is said they have negative equity. Sometimes the term “underwater” is also used to describe this situation. A borrower in this position is said to be “upside-down.”
How is equity calculated?
You may be asked to calculate this on the real estate licensing exam. To do so, you subtract any loans that are outstanding from the market value of a property. For example, a property has a market value of $250,000. The owner of the property currently owes $190,000 in mortgage loans that are against the property. The property owner’s equity would be the difference, or $60,000.
The more equity a property owner has in a property, the lower the risk for a lender to lend on the property. In other words, the more money a borrower puts down when buying a home, the less the risk the lender faces. This is why a lender will require private mortgage insurance (PMI) if a borrower puts less than 20% down when obtaining a loan.
You can learn more about PMI here.
What is a home equity line-of-credit loan (HELOC)?
A mortgage loan that allows the borrower to obtain multiple advances of the loan proceeds at the borrower’s discretion, up to an amount that represents a specific percentage of the borrower’s equity in the property. In other words, it is a second mortgage that turns home value (equity) into cash the owner can access as needed.
What else can help me prepare to pass my real estate licensing exam on my first attempt?
Other tips to help you pass your real estate licensing exam on your first attempt:
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