WHAT DO YOU MEAN BY “EQUITY” IN A HOME?
There are many terminologies in the mortgage industry. The ordinary person may not know or understand many of such terminologies. But if you are ever going to borrow money using your house as security, then you must understand the word “EQUITY” as used in the borrowing language.
The word “Equity” has many meanings; especially in the area of law. I do not want to belabour you with the definition of the many meanings of the word.
As far as the mortgage industry is concerned, Equity is the difference between the appraised value of a home and the mortgage loan you currently carry on the home. To explain further, let us say in June 2009, you purchased a home for $300,000 and you contributed $60,000 of your own money and borrowed $240,000 from the bank, then the equity is the home is $60,000. If five years later, the value of the home has increased to $360,000 and you have managed to pay down the mortgage loan you borrowed to $220,000, the equity in the home has jumped to $!40,000; (ie $360,000 - $220,000).
The Equity is not your money
While the equity in your home can be counted as part of your networth, you cannot lay your hands on that money easily. The equity is yours only if you sell the house. While you live in the house, however, you can only borrow against the equity in your home if you need the money to start a business or pay off some nagging debts. And, if you borrow money you have to pay interest, you know that.
You must Qualify to borrow the Equity in your home.
As I have said above, the equity in your home is not readily available to you. You must apply to borrow the equity and you must qualify to borrow that equity. To qualify, you must have the right income and the right credit rating or you will not get the funds or if you do, it may cost you more than you would think. Even with the right income and credit, you cannot borrow all the equity in your home. You can normally borrow only up to 85% of the value of your home.
In the example above, the value of the home is $360,000. 85% of $360,000 is $306,000. The amount you can borrow then is $306,000 minus $220,000 equal to $86,000, even though the full equity is $140,000. Mortgage lending rules and risk preferences mandate lenders to ask borrowers to reserve 15% of the value of their home in equity.
If you need further information about mortgage or debt problems, contact
Ken Ntiamoa, MBA
BIA Insolvency Counsellor
(416-398-1877 ext 201)