When one wants to sell a house, one comes to know about a lot of terminology pertaining to Property Law. So, if one decides to sell a house that is the right time to know all about home equity which can make or break one's real estate transaction.
Equity is the difference between how much is owed on the house and its actual market value. The key to determining equity in a house is calculating the market value correctly, meaning the price the house will bring under present market conditions. What's left after paying off the mortgage and all selling expenses belongs to the seller.
The phrase "market value" has accidentally caused great grief to home owners and lenders alike in the present real estate scenario. Banks provided loans against market values that declined, leaving thousands of home owners unable to sell their homes because they owe more than their homes are worth at the present time. This is a very precarious situation concerning the real estate market, which needs to be addressed soon. Equity in a house is traditionally obtained in the following ways:
- The sum of the down payment plus the total of monthly payments equals equity in a house with a declining mortgage balance
- The market value of a house increases every year
A combination of these two factors has given homeowners and lenders a false sense of confidence that market values would continue to increase. But market values have not increased as expected, so the amount of home equity has declined or disappeared in many houses. The general public has begun to understand that home equity is not a fixed amount like a mortgage balance.
Equity is determined by subtracting the mortgage balance from the market value, and since the market value fluctuates, the value of home equity value also fluctuates and, even more importantly, can completely disappear. The day a house is sold is when one understands the real equity of that house.