When a mortgage loan is used to buy a home, the lender has an interest in the home. Until the loan is paid off, the bank or lender continues to have a security interest in the property.

Home equity is the portion that you, the homeowner, have an interest in. The downpayment made on the home provides the initial equity to the homeowner. After that, more equity is gained each month as mortgage payments are made. 

Another way homeowners gain equity is through rising property values. Due to low inventory and low mortgage rates driving home rates up, homeowners across the nation have seen a surge in home equity this year. In the second quarter of 2020, CoreLogic’s Homeowner Equity Insights show a 6.6% increase in equity rates.  For the average homeowner, this means a gain of approximately $9,800 in the past year. 

What does this mean for sellers?

With the rise in home equity, sellers are better equipped now to make a move to a new home. Sellers can put their increase in equity toward a property that may have been out of budget a year ago. Mark Fleming, Chief Economist at First American, said: 

“As homeowners gain equity in their homes, they are more likely to consider using that equity to purchase a larger or more attractive home – the wealth effect of rising equity. In today’s housing market, fast rising demand against the limited supply of homes for sale has resulted in continued house price appreciation.”

Benefits of Home Equity

Aside from more options to buy a new home, increased equity means increased wealth. 

For those who want to use the equity they have in their home, a home equity loan can be used to pay off high-interest debt, make a down payment on a new home, or complete renovations. However, homeowners do need to weigh the pros and cons of home equity loans, as it puts your home at risk should you fail to make payments. 

Another benefit is an increase in equity can be transferred to future generations, directly increasing the wealth of those receiving the gift. The increase in net worth gives also homeowners a better chance to invest in their children, which becomes an indirect way of setting their children up for financial success of their own. 

With home values projected to continue their rise in 2021, homeowners are in a good position to gain more equity. If you are ready to utilize your equity and make a move, contact us today to learn how The Lenard Team can help you!