I don't quite understand how home equity works.?

I have been thinking about tapping into the equity of my house for some improvement projects and what not. I have always been under the impression that the equity of my house is MY money. As far as what I have paid into the house vs it's current value. So why do I have to take out a loan against my own money?

14 Answers

  • 2 years ago

    If you don t take a loan out against the equity the only way to tap into that equity is to SELL YOUR HOME. Its a financial thing called liquidity (the ease of turning an investment into cash), and real estate isn t a very liquid investment.

  • 2 years ago

    Equity is the VALUE of your house above the VALUE of your mortgage. Equity can turn into money by selling the house and paying off the mortgage. But if you want to keep the house you must take a loan against the VALUE of your equity, and repay it as you would any loan, including your original mortgage. Another option would be to refinance your original mortgage to access that VALUE.

  • 2 years ago

    Because that is the only way to actually access the money, since it's tied up in the asset. You can't just rip off a piece of house and pay with it, can you?

  • 2 years ago

    Your equity certainly is your money, but it's not "liquid" money because you haven't sold your house to recover it. It only exists in the paper "value" of your house. So, in order to access that money without selling your house, you must get a loan that uses your equity value as collateral. If you were to default on your loan, the loan company could legally seize your house and sell it to recover the money they lended you.

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  • 2 years ago

    Ok, the house is worth 200K and the current loan is 50k leaving 150k in equity. That is your money but how are you planning to get at it. Not like you can go to Lowes and write a check that will add to the debt on your house.

    You can get a Home Equity Line (not a loan) which will essentially give you access to much of that equity and then when you need money you simply transfer money from the line into your bank account and this automatically increases the debt on your house (and pay down the line and it decreases).

  • 2 years ago

    If you own a car with no loan that you could sell for $10,000, then you have $10,000 equity in that car. You can't use that theoretical $10,000 though, right? Of course not. You have an asset (something of value you own) worth $10,000. If you want cash, you can sell the car for $10,000 and no longer have a car, OR you can get a loan which is backed by the value of the car. (I give you a loan for $7,500 and if you don't pay me back I get your car.)

    No different with the equity in your home. You don't have cash. Your options to get the cash are to sell the house or get someone to give you a loan based on the equity in your home.)

  • Never
    Lv 7
    2 years ago

    You don't have to take out a loan. Your alternative is selling the house.

  • 2 years ago

    The equity in your house is its current value minus any mortgage loans. So, if you have no mortgage, the equity will be equal to its current market value.

    Why do you need to take out a loan if you have equity? Right now the value is locked up. It cannot be released until you sell. A bank can lend you money using the value of the house as security to make sure you repay them. That solves the problem of having to sell the house.

    But generally borrowing against a house to improve it is something people should only do if they really need to, for example because the roof is failing and they do not have the cash to replace it or that they need to do it up a bit to sell it. The reason why it is not a good financial strategy is that those loans are expensive and have to be repaid on a schedule. If this is not an urgent matter, put a little money aside each month and wait till you have enough to pay cash for the improvements.

    Delayed gratification has gone out of fashion in today's world but you will be glad you did this the right way around.

  • 2 years ago

    In order to access that money, you either have to sell the house and take the cash (after paying off what is left of the mortgage) or access a home equity loan. Equity is not really "money" as you would find in a savings account. When you took out the mortgage, you made a promise to the lender that you would pay back the mortgage over time in exchange for the cash to pay for the mortgage. Think of your house as your vehicle - you have equity in your vehicle since equity is the value of an asset minus what you owe. Equity is tied to the asset, it is not cash. You can't look at your vehicle and say I own my vehicle which is worth $10,000 so I should have $10,000 in my pocket and also the truck - where is that money going to come from (hint - you sell the vehicle). Where do you think the money from your equity is going to come from (yep, sell the house to cash in the equity).

  • 2 years ago

    You own property. You don't own "money." A home equity loan just means you are mortgaging your property to get money. When you borrow money, the house is collateral. The bank has a lien for it's protection. You don't pay the loan and you lose the house.

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