Real estate equity is one of the standard terms that real estate investors use. So if you are unclear about equity in real estate, here is a brief guide for you.
Knowing the basics is very important when planning to invest in real estate, especially when it’s about the terminology related to it. And equity real estate is one of the terms that you must understand.
Read on to know everything it surrounds.
What does equity mean in real estate?
In most straightforward words, equity real estate is the difference between the net market price of the property and the amount of money you have to pay on the mortgage. Finding out real estate equity is simple. You only have to subtract the total value of the mortgage from the property’s fair market value.
Equity Real Estate in Practical Life
Let us take a real-life example to elaborate more about equity in real estate.
Assume that you are purchasing an investment property that has a fair market value of $250,0000. You apply for a home loan, and the lender requires you to pay a down payment of 20%. In this case, the total down payment will be $50000. But you want to spend a down payment of $60000. Therefore, the lender agrees to give you $190,000. You must be wondering what equity is in this case.
Here is the explanation. In this scenario, equity is the money you have put by yourself in the property. It can be easily calculated by deducting the amount of money the lender offered you from the property’s fair market value. Therefore the equity will be equal to the amount that you have paid from your own account.
You might be thinking that equity, in this case, is quite apparent. But, we have assumed the most straightforward scenario possible. Sometimes a real estate investor invests in a property with a home loan and applies renovations to the property even after paying the down payment. In this scenario, their equity increases because they add the cost of renovation to the initial down payment.
Way to build equity on a real estate investment
Equity in real estate is not a constant figure that you agree on. But it is a figure that keeps fluctuating with the money spent on the property. To build up the equity, you can perform any of the following.
- Repaying the mortgage
During the period of your mortgage payments, the equity of real estate keeps building up. It includes any tax payments or insurance for the property. Therefore, if you are more focused on paying your mortgage, there will be a greater chance to build the equity.
- Paying extra on mortgage principal
You can also build up equity on an investment property by paying extra for mortgage principal. For example, if your monthly mortgage payment is $500, you can instead pay $600 if your financial condition allows you.
- Applying improvements to the property
Applying improvements to the property every time allows you to build equity. The only way to find out how much equity you have built up is when you will sell the property. The reason is that the renovations and improvements lead to the growth in the property’s fair market value. Therefore the increase in the rate of the property is your profit and not the lender’s because you are the owner.
- The down payment
The more amount you put in the down payment, you get more initial equity on the property. Therefore if your financial situation allows you to pay a more down payment, go ahead.
The equity in real estate depends on all the above factors, and you can decide on a way that works for you.