Home equity is the difference between the market value of a property or residence and the amount of the liens held against it. For example, if you own a house worth $200,000 and you still owe the bank $150,000 on the mortgage, you have home equity of $50,000.
What Factors Influence Home Equity?
As mentioned above, mortgages and other home loans (including home equity lines of credit) count as liens against a property. They reduce home equity. Other factors might include depreciation, tax liens, and construction liens.
For example, if a homeowner fails to pay property taxes on his or her home, the government can place a lien on the property. When the homeowner sells the house, the government receives what it is due before the homeowner is paid.
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What is Negative Home Equity?
Negative equity occurs when the value of the home is less than the money owed. The finance industry refers to this situation as "underwater." In certain economic climates, property depreciation and sky-high interest rates conspire to lower the value of a property compared to what the homeowner owes, according to Investopedia.
How is Home Equity Used?
Since home equity isn't liquid, homeowners sometimes convert the equity into cash through reverse mortgages, second mortgages, and home equity lines of credit. A financial institution pays the homeowner a certain percentage of the equity with the property held as collateral.
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