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Home Equity
Loans-What is Home
Equity?
In a nutshell
home equity is the difference between what your home is worth and
the amount you owe on it. For most homeowners their home is their
biggest asset and it usually represents a treasure trove of cash. In
2005 the value of home equity across the US was $11.3 trillion. The
percentage of home ownership in 2005 was 69% down slightly from the
record 69.2 % in 2004. Almost 124 million Americans own their own
home.
Lenders will
approve borrowers for a certain percentage of the value of the
property minus the amount owed. Let's look at an example.
In 2001 Bill and
Mary bought a home for $200,000 with a 15% down payment and took a
first mortgage loan for the balance. Now five years later the home
is worth $230,000. Bill and Mary have managed to reduce the
principal on the mortgage to $160,000. The lender they have been
talking to will lend as much as 80% LTV (loan to value) on the home.
In our example
$230,000 x 80% =$184,000 minus the amount owed $160,000 = $24,000.
Bill and Mary would be able to borrow a maximum of $24,000 from this
lender.
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