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What is Equity?

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We hear the word “equity” used quite often in our world today, but have you ever stopped to think about what it really means? If you were walking in the city and a man dressed in a suit and tie ran up to you, shoved a microphone in your face, and questioned, “For $50,000, can you tell us “What is Equity?” I’d say that 90% of the population would answer incorrectly.

What is Equity

In general terms, equity is ownership. When one refers to “percent equity”, they are referring to the percent of the asset that you own. Since this term is most often used with real estate, let’s use your home as an example.

Let’s say you own your home free and clear. You have paid off the mortgage and you own 100% of your home. You can say that you have 100% equity in your home – you have 100% ownership of your property.

What if you just bought your home? You were a good girl or boy and put 20% down on the house. The bank paid for the other 80% in order for you to move in. So, how much equity do you have in your home? If your answer is 20%, you are most likely incorrect (don’t worry, I didn’t teach this to you yet). Equity is not dependent on how much you paid for the house, it is dependent on how much the house is worth.

So, let’s say you purchased the house for $100,000 and paid $20,000 (20%) for the down-payment (which mean the you owe the bank $80,000). As it turns out, this house is actually valued at $120,000 (you made a good buy – congrats)! Your asset is valued at $120,000 and your debt is $80,000, which means that your equity in the house is $40,000!

Negative Equity in the Housing Crisis

Do you remember the housing crisis in 2007 (how could you forget – it’s practically still going on)? The issue with the mortgages back then was one of equity. During the news reports, we repeatedly heard the phrase, “upside-down mortgages”. This simply meant that homeowners had negative equity in their homes! They owed the bank more than what it was worth. If they would have sold the home, they would have had to pay the bank more money in order to clear their debts. This led to many mortgage defaults, and ultimately, the temporary downfall of our economy.

Do you have a positive equity in your propertires! Hopefully, you have 100% equity! 🙂

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AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

34 Comments

  1. I don’t have 100% equity yet. It will take a number of years as I am working on higher interest rate debt first. But there will come a day when that happens; you can be sure of it.

    • I can’t wait for the day where I can say that I have 100% equity in my home! If all goes according to plan, it will be soon! 🙂

  2. I have a growing problem. I am behind on my mortgage, for several reasons I thought were strategic. The banks won’t refinance because of late payments. They won’t do a mod because we don’t qualify. I want to call them today and see how I can turn this around but I they don’t budge and I would like a little more information going forward… because if I don’t do something soon the bank will have 100 percent equity and I will have 0.

    • That’s scary stuff Jai! You must have something that you can sell in order to catch up on your payments, right? Losing your home is a huge negative financially. That could loom over you for the next 10 years and restrict you from financial success. Do your best to pay it, or you’ll have some rough times ahead.

  3. We bought out house on the cusp on the crisis in 2008. We got a great deal but prices have slumped a bit since then. We are not close to 100% equity but with our down payment we are at about 40%. With our recent refinance, I hope to see that number jump up quickly.

    • My wife and I are still hovering around 20% I think. Once we are done with our renovations, I hope to have a 40% equity, just like you! Soon, it will be 100% though. 🙂

  4. I think you’re right, most people don’t really know what equity really is, but it’s a very important concept to understand. I just recently bought a small house to fix up and paid cash (100% equity, Yay!). I’m about to put it on the market and hope to make a good profit.

    The more equity you have the better position you are in to succeed financially, that’s why it’s always best to put down the largest down payment you can when you buy a house. Less chance you can end up with negative equity.

    • That’s awesome that you paid with cash! Because there’s no mortgage eating away at your profits, you really don’t have to worry about selling it immediately either. I love it!

  5. We have positive equity in our house and we plan to keep it that way. In fact we are hoping to pay it off sooner rather than later.

    • Having 100% equity sure would be a treat wouldn’t it? We plan to be there soon too. 🙂

  6. Thankfully my wife and I bought our home about a year and a half ago, but with wedding expenses we only put down the minimum 3.5% on our FHA mortgage. I believe if my calculations are correct if my home value has not gone down, we are at 5% Equity lol, depressing isn’t it. I am trying to pay off my other debt so I can make additional payments to my home.

    • Yep, I would take care of those other debts first, because they most likely have a higher percent interest on them. The FHA loan is not always the best financial move either. Aren’t there additional fees because you had such a low down-payment?

  7. No equity yet..we’re still renters! I can’t imaging buying a house pre 2007 and having 0 equity today. Unfortunately that’s a reality for a lot of people though.

    • Yep, I’m sure there were quite a few people that were rushed into buying a home, and now they owe more than the home is worth! Don’t feel bad about renting. If you have a cheap place, it can actually be a better financial move than buying a home.

  8. We have maybe 15% equity right now. We bought three years ago and have lost maybe 5% in the housing crisis. We have a long way to go to 100% but we will get there.

    • Glad to hear from you David! I was worried you fell off the face of the earth! Good luck getting to 100%. I’ll be telling our story of our debt payoff along the way. Maybe it could be motivation for you.

      • I did not realize how much time writing a blog and coming up with good ideas would take. With 4 kids it is a bit of a challenge, starting the New Year off right and will stay on track. Also, I am realizing that I need to find my own voice on the net. So, a little soul searching as well.

        • The web definitely has its fair share of personal finance blogs. You need to find our how to be different (it’s not easy…..I’m still trying to be different….), and then you’ll find success.

  9. I have 80% equity in my home, but I will pay it off in 5.5 years. Hopefully the value will increase over that time.

    • 80% is pretty solid krantcents! Why won’t you pay off your house sooner? It seems like you could since your debt is a very low portion of the overall value of the home.

  10. We bought in 2005. We had some down, but not 20%. At the height of the market (say mid 2007) we had over 20% equity. Now, we are negative. Not by much- only a few thousand, but this is still after over 6 years of payments (and paying extra on the principal at that), so it’s a little depressing.
    Still, we have no plans to move, and no problems making the mortgage payment, so we’ll stay where we are for now.

    • That must stink to be negative on your home mortgage. I’m so glad that I wasn’t in a position to buy a house before 2007. But, it’s a good thing that you have no trouble making the payment. Kudos for that!

      • It stinks even more that we’re not eligible for HARP, so our interest rate is still at 6% because we can’t refinance without having PMI.
        Still, with the exception of not having 20% down when we bought, we followed the rules- bought a house we could afford, using a fixed rate mortgage, that we intended to stay in fairly long term. Those pieces, more than anything, are what have kept us from being part of the housing crisis.

        • That’s certainly a good move to keep your house payments managable. I bet you’re relieved that you didn’t buy a mansion that you could no longer afford. Keep working at it though. You’ll get rid of that PMI in no-time! 🙂

  11. I wonder if I should start a blog about it… Finding Yakezie has been very inspirational and even though the banks aren’t too helpful that doesn’t mean I need to do nothing. Just wanted to see what your thoughts were.

    • I think that there would be tons of people that relate to your situation, which could potentially make for a popular blog (or niche site). Do you have a plan of action to get back on track?

  12. Well my plan is to start paying down. I have looked to raise rents in a couple of the rooms I had to rent and I am selling things off that are no longer needed to help out.

    I just made a payment today which felt good to make. Even though I feel the banks have bailed on a majority of homeowners I am going to finish my end of the deal because I feel invigorated by the Yakezie forums.

    • I’m glad that you feel motivated to do the right thing and pay down the mortgage on that house! You should research what would happen if you didn’t – that would definitely be motivation as well.

  13. I have positive equity in the cash I hold. 🙂
    No real estate yet but getting there.

    • Don’t rush on the real-estate. The prices will be low for quite a while. 😉

  14. I have one small house that I own outright. I just bought a townhouse for $120,000 and put $40,000 down on it. The house is valued at $158,000 which is why I bought it. My thought is do you really have more equity because of the value of the home if it doesn’t sell for that value? Or does that not really matter when looking at equity?

    • Equity is based on market value. You may have purchased the home for cheaper because the sellers were impatient, or perhaps it was a foreclosure, but if you were to resell it, you would (in theory) be able to get market value for your house. Another point, when I say market value, I don’t mean 2X your taxable value. Often times, that’s not very accurate. Market value is an average of actual home sales in your area.

      Kudos on your equity though. Sounds like you are in an awesome position!!!


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