Out of all of the aspects of homeownership, building equity in your home is one of the most important. It is one of the best ways to build wealth and can provide an inheritance to your family. Let’s look into the details and gain a better understanding of what we’re talking about by asking what home equity is and how it impacts home buyers and sellers in Westfield, Cranford, Clark, Scotch Plains, Fanwood and Mountainside Areas.
What Is Home Equity?
To understand what equity in a home is, we can start by thinking about how you purchase a property.
In most cases, home buyers do not have the full amount of money on hand to purchase a home. They need a mortgage. The lender will hopefully approve them for a home loan equaling the agreed-upon sale price minus the buyer’s down payment.
A buyer wants to purchase a home, gets a loan through a mortgage lender, and can then purchase the home using that loaned money.
Market Value
Next, we need to go over what the market value of a home means.
Many people think that the market value of a home is determined by having an appraisal done, but that appraisal only finds the appraised value of the home.
The appraisal value of a home is done by putting together multiple factors, These include home features, age, condition, and the value of surrounding, similar homes (often referred to as comps). An appraised value is a very straightforward, calculated way of determining value.
On the other hand, the market value is how much a buyer is willing to pay for the home.
The difference here is that the market value relies on what the buyers involved are willing to pay for the home. Therefore, having an appraisal done does not provide for you a number by which any buyer should pay for your home. In the current market (spring/summer 2021) rising market prices are outpacing appraisals and we are sometimes seeing a home appraise under the current market value.
Finally, to determine equity, take the market value of the home and subtract the remainder of the owner’s loan. The resulting difference is the amount of home equity the owner currently has in that property.
To provide an example, a seller receives an offer on their home for $730,000 and they owe $190,000 on their mortgage. The resulting equity the owner has acquired in their property is $540,000.
How Does It Impact Buyers and Sellers?
But why does equity matter to us as either a buyer or a seller? Shouldn’t equity only be something that the seller’s worried about in calculating the proceeds from their home sale?
The equity generated on a property does predominantly help out the seller, as it gives them an opportunity to leverage that equity for a down payment on a new house or improving their current property in preparation for sale using a loan.
However, buyers can see benefits from a property owner with substantial equity.
Sellers with a lot of equity have a lot more room for negotiating a home’s sale price. They are not constrained by what they owe. Of course, sellers want to get as much as possible for their property, but that increased equity means they have the ability to opt for a more desirable closing date or take slightly less from a buyer who is better qualified.
A buyer who currently owns a home in which they have significant equity can take advantage of this by committing to more earnest money or a larger down payment. As you can see, there are great positives for both buyers and sellers when it comes to home equity.
Help Understanding Home Equity and Other Real Estate Terms in Westfield, Cranford, Clark, Scotch Plains, Fanwood and Mountainside Areas
If you’re confused by what home equity, appraised value, market value, or other real estate terms mean for your home purchase or sale, contact us today at 917-608-7277!