What is Home Equity?

When you buy a home, using a mortgage, you are basically borrowing the current cost of the property from the bank, and using that to buy it. You then pay back the cost of this, together with interest rates and any other fees etc, to the bank over the period of your mortgage.

Your mortgage deal is therefore worked out according to the price or value of the property at the time that you negotiate the mortgage deal. However, properties often acquire value over time, after you’ve made the deal and started paying the mortgage off. In addition to this, the amount of the property that you’ve paid for naturally increases over time as you make your mortgage payments, and your interest in the property therefore increases.

Home equity is therefore a way of measuring the value of your ownership of the property. It’s a way of putting a value on what you own in terms of the property, taking into account how much of the mortgage you’ve paid off and the property’s market value at the current time.

Loans and Equity Release

The most common reason that people want to find out about home equity, is to use it to gain funds. Equity release or home equity loans are among the ways that you can use the equity in your home to obtain lending.

A number of online calculators are able to help you to calculate, first, the value of any equity that may be potentially released on your property, and second, the long term impact of this on your finances.

You should think very carefully before opting for any equity release options, in the same way that you would before embarking on any lending secured against your property.

Equity release can be a useful and valuable option for homeowners needing to get their hands on funds. However you should compare it as thoroughly as you can with your other options before taking any decisions.

Often, older people are among those who consider equity release, however if this applies to you, you should bear in mind that you may end up leaving less to your beneficiaries when you die.

The natural advantage to equity release is that you acquire funds to use for whatever purpose, whether it’s for home improvements or to pay off other debts. The natural disadvantage is that it basically constitutes further lending on your property, and therefore comes at a cost.