At SmartRE, defining home equity is an existential exercise.  As democratizers of the homeownership experience, we spend every moment trying to help our buyers and homeowners mutually benefit from home equity. 

Home equity is the value of a home that is owned by the title holder.  It is defined mathematically by the formula “Home Value – Outstanding Home Debt = Home Equity”.   So, if the home’s value is $1,000,000 and there is a $500,000 mortgage on the home, then the title holder has $500,000 in home equity. 

One portion of the equation – Home Value – is a moving target that fluctuates with changes in neighborhoods, the local, state, and national economies, some home improvements, and consumer taste.  When an economy is doing well and more people move into an area, the number of homes available on the market decrease and the value of all of the homes increase because they are in high demand.  If a school district improves its results, the area in that district will see increased home values.  If a home in Buffalo is the only one in it’s neighborhood that is weatherized, uses solar panels for electricity and geothermal systems for heating and cooling, its value will be higher relative to less efficient homes in the area.  Conversely, if people are leaving an area, or schools are suffering, or a home is in disrepair, the value of the home will decrease.   

Remember, what is paid for a home isn’t necessarily the home’s value in the future.  That is dictated through the factors outlined above.   A home’s value is determined by an appraisal, which compares the home to similar homes nearby. 

The other factor in the equation should be steadily going down over time.  Outstanding Home Debt is another way of saying mortgage.  A mortgage is the loan taken when a home is purchased.  Mortgages require monthly payments of interest and the loan principal.  Depending upon interest rate and the size of payments made, early year payments will pay more interest than principal.  But as payments are made, assuming that the value of the home is constant, the amount of home equity will increase.  Additional loans using the home’s value as collateral, like a second mortgage or a home equity loan, will add debt and decrease home equity.

Let’s look at some examples.  Using the example above, let’s say the home grows in value from $1,000,000 to $1,100,000.  And after ten years, say the amount owed decreases from $500,000 to $400,000.  In this case, the formula becomes $1,100,000 – $400,000 = $710,000.  Now assume that the home decreased in value by $200,000.  Then the equity would be $800,000 – $400,000 = $400,000. 

Regardless of the scenario, home equity is a powerful tool for a family.  As home equity grows, the homeowner has more flexibility to determine their financial future.  There may be a temptation to sell the home or take a home equity loan to take advantage of that home equity, but those moves come with significant costs.  Downsizing has tax implications.  Reverse mortgages have hidden fees, put limits on what you can do with the proceeds, and dictate with whom you can share the home.  Home equity loans just add more debt. 

SmartRE doesn’t pose these issues.  We let you take advantage of your home equity without ongoing costs, closing fees, meetings with realtors and lawyers, monthly payments, and all of the other hidden real and emotional costs associated with alternatives like moving.  At SmartRE, for just a low, one-time fee, a homeowner can cash in their home equity while maintaining complete control of the home, without some predetermined payback period.  Buying back the equity occurs only when the homeowner is ready, either through the sale of the home or the repurchase on our app.  That’s why SmartRE is smarter.

What is Home Equity

Home equity is a term associated with real estate. Over time, homeowners often wonder if there’s anything they can do to leverage the equity that they’ve gained while owning the home. Understanding what home equity is and how to use it is key to making smart decisions about the way to use it when you need it.

Defining Home Equity

Put simply, home equity is the actual part of the home that you own after subtracting any mortgages or other money owed against the home. For example, if you bought a home for $800,000 and owe $600,000 on your mortgage you own $200,000 of it, not including any down payment you made. So who owns the rest? You own the entire house, but it’s used as the collateral for the repayment of the loan.

Because the house is considered collateral, the lender can secure its interest in the home through a lien. And that lien is the loan that gives you the money to buy your house or refinance it as the case may be. Many home loans equally apply payments to your principal and your interest. As the loan is paid down, your equity in the home rises over time.

Ways to Use Home Equity

Home equity is important because you can borrow against it for home expenses and other expenses through transactions such as refinances, home equity loans, home equity lines of credit, and reverse mortgages. People often utilize their home equity to get cash for expenses. This is due to mortgage interest usually being tax-deductible and when that is factored in with the interest rate, home equity transactions are a better alternative to credit cards or personal loans.

Home improvements are one of the most common expenses homeowners use home equity for. Kitchen and bathroom renovations top the list of improvements. But others like improving or building a deck and replacing a garage door or entry door are just as important.

Using your home equity to pay off other debts or set up emergency funds is another way to leverage home equity within reason. Before going through the process to use home equity to pay off expenses, consider how the funds will be used and make sure that the terms of repayment are clear. This is very important because leveraging home equity for personal use could raise debt payments later on.

Leveraging Home Equity with Caution

Home equity is a smart way to take care of expenses. But not all of the methods of leveraging home equity are created equally. So it’s essential to know what some of the cons of these options are. Reverse mortgages don’t require any payments to be made and the amount owed never exceeds the value of the house. But reverse mortgages are very complex transactions and they have high closing costs on top of the interest that accrues on the loan amount.

Home equity loans offer more flexibility in terms of the costs associated with them. But home equity loans and lines of credit require regular payments, along with payments on any existing mortgages on the property. The interest rate may go up over time if it’s a variable one and the payments you make can go up after the draw period closes. Borrowing more than the home is worth can also be a risk since the house value can go up or down over time. The risks of refinancing are similar to home equity lines. A refinance provides cash right away but it extends an existing mortgage and increases any existing payment which may make it a burden later on if there’s a decrease in income.

Leveraging a Piece of Home Equity

The main issue with traditional methods of accessing home equity is they put your home at risk due to terms of conditions of taking the loan like what happens if you default along with interest rates, fees, and closing costs. So why not consider leveraging a piece of your home rather than putting the whole property at risk? SmartRE does just that. It allows homeowners to sell their home in fractions starting at $100,000 with a defined fee. The homeowner can purchase the amount of equity sold back at any time with no set time limit.

If you’re interested in learning how SmartRE can help you leverage your home equity while maintaining ownership of your home, contact SmartRE today!