FAQs on Home Equity
Q. What is Equity?
A. Equity is the fair market value of your house minus any mortgages or liens. Your equity increases as you pay down the principal balance on your mortgage, as you make improvements to your home, and as property values rise in your neighborhood. The longer you have lived in your house, the more equity you probably have, assuming that you have not taken additional mortgage loans.
Q. How do I Figure out the Equity in my Home?
A. Take the fair market value of the home and subtract the amount owed on any mortgages or liens on the home.
For example, suppose you bought a home for $60,000 in 1980 and you still owe about $29,500 on the mortgage. Over the years, you have added a new roof, a screened porch, and a central air conditioning system. An appraiser has recently valued your house at $150,000. How much equity do you have?
Fair market value $150,000
- Mortgage balance $29,500
Q. How can I Protect the Equity in my Home?
A. If you are a homeowner thinking about getting a mortgage loan, stop and ask yourself some questions. First, ask yourself why you need money. Then ask yourself if you really need to get a loan.
If you need money for a vacation or to buy a car or to pay for home improvements, would it be better to save up the money instead? If you have medical bills, are they covered by health insurance, Medicare, or Medicaid? If you need home repairs or improvements you are low-income, are there home improvement grants or low cost loans from city or county or nonprofit agencies you could ask for? If you are having financial problems and creditors are harassing you to pay your bills, contact the Consumer Credit Counseling Service for help in setting up a payment plan.
If you do need to borrow money, consider loans that do not use your house as collateral.
If you are buying a home or decide you need to borrow money on your home, go to your bank, credit union, or other low cost mortgage lender. Shop around for the lowest interest rate, points, and closing costs. Do not enter into deals with mortgage lenders or mortgage brokers who contact you directly by telephone, mail, flyers, or by knocking on your door. If you cannot get a low cost loan, get advice about other options from your local nonprofit housing counseling agency. Seniors should ask specifically about reverse mortgages.
Get an attorney, nonprofit housing counselor, or someone else you trust to review all loan documents and contracts before you sign anything.
Common Equity Scams
See the Home Scams Resource page to learn about common equity, theft, and title conversion scams.
Glossary of Equity Terms
Fair Market Value: The likely selling price of a home between a willing buyer and a willing seller on the open market. It is usually figured out by an appraiser for a new mortgage or home equity loan.
Liens: The legal claim a creditor has to a property that is used as a security for repayment of a debt. All outstanding liens must be paid before ownership of a property can be transferred from one party to another.