What is equity?

What is equity?

What is equity?

Categories: None | Tags: LoansWhat IsFirst Time HomebuyerFirst Time HomebuyerGlossary

What is equity?
Equity is the difference between how much house is worth and the total amount of loans or other liens that are secured by the house.  For example if you buy a $200,000 house and make a 5% down payment of $10,000, you would get a loan for $190,000.  Assuming you do not finance any of your closing costs or mortgage insurance, your equity in the home would be $10,000 or 5% of the home.  Here is the math:     $200,000 – $190,000 = $10,000.

As you pay down the principal on your mortgage loan, your equity goes up.  By paying a little extra each month toward the principal on your loan amount your equity in your home will increase more rapidly.  Equity in your home can also increase if the value of your home goes up over time due to changes in your real estate market.  The opposite is also true.  The value of your home and your equity in your home can decrease as a result of the changes to your local real estate market.

What is Loan-to-Value?
A related concept to “equity” is called loan-to-value.  Loan-to-value (ltv) is the percentage of the loan relative to the current fair market value of a property.   Based on the above example the loan-to-value would be calculated as follows:   (190,000/$200,000) X 100 = 95%

Various loan programs like FHA, VA, Conventional, and USDA have maximum loan- to-value limits which the lender must conform to when they are making mortgage loans.

What is FMV?
Mortgage lenders are very careful to make sure they have an accurate and unbiased assessment of the value of the property being considered for financing.  This independent assessment of the value of the home is called the Fair Market Value (FMV).  The lender hires a licensed real estate appraiser to complete an appraisal on the property and to calculate the properties Fair Market Value (FMV).  The cost of the appraisal is usually paid by the borrower and costs around $400-$500 and is typically not refundable.

2018-06-14T07:59:44+00:00July 24th, 2017|Categories: FAQs|0 Comments

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