What Is Equity: Why it’s Good and How to Utilize It

Key takeaways

• Equity is a financial term that conveys the value of your ownership of an asset (such as your house).

• Your equity in your home is its current fair market value minus the value of your mortgage and any other debts tied to the property.

• A house is an illiquid form of equity, compared to other assets like cash.

• Homeowners have a few options for accessing home liquidity, including selling, home equity loans, home equity lines of credit and home equity agreements.

U.S. homeowners with mortgages benefited from the largest one-year gain in average home equity wealth in the first quarter of 20222, according to a new report. This translated to a $3.8 trillion increase in the collective wealth of Americans since 2021. Eye-popping numbers like those may leave you with a simple, yet critical question: What is equity, exactly? Here, we’ll answer that question and provide some important context on the benefits of equity and how you can use it.

Understanding equity as a financial term

Equity is a financial term that we use to convey two principles: ownership and value. In other words, equity is the value of the property you own, minus any obligations tied to your property. The following equation is a common expression of equity:

Equity = Assets – Liabilities

You may think of your equity collectively (i.e., all your assets and debts), which is akin to a calculation of your monetary net worth. Alternatively, you may also think of equity with respect to a specific piece of property (like your house).

What is equity in your home?

You will often hear people discuss equity with specific reference to their homes and other real estate because a personal residence is usually the largest source of one’s wealth. The equity in a home will vary from homeowner to homeowner, and can change over time due to several different factors.

• The amount of your down payment when you bought the house

• The value of any mortgage and other loans connected to the house

• Current market value

How to calculate the equity in your home

You can calculate the estimated equity in your home by first finding an appraisal of its current fair market value (FMV). You may be able to view this information by looking at recent property tax assessments or through third-party real estate sale platforms.

After finding your home’s FMV, subtract the value of any mortgage, home equity line of credit (HELOC), home equity loan (HEL) or other obligation tied to the property. Once you have subtracted debts on the property from its value, the remainder will be an estimate of your equity in the home.

Why is equity good?

Having equity is generally a good thing because it means you have value in your assets, which can become a great financial resource for pursuing life and money goals.

More equity also generally translates to having less debt, which can help with your credit score. A strong credit score can provide benefits in the form of favorable lending terms and greater financing options.

Ways to use your equity to further your life and finance goals

The different ways you can benefit from using your equity are far-reaching. They will usually depend on a combination of factors, such as the status of your finances along with other aspirations you may have for you or your family’s life. Some of the more common ways to use your home equity may include:

• Paying off high-interest loans (e.g., student loans, credit cards, personal loans)

• Paying for a home improvement or renovation project

• Helping with your child’s college tuition

• Starting a small business or other passion project

• Covering a large medical expense

• Contributing to a retirement account or other investment

While the options for using home equity are many, the ways of obtaining that equity are more limited. Compared to assets like cash, your home’s equity is generally illiquid, which means you must complete an extra step before being able to use that equity to fund your goals.

Making your home equity more liquid

The most obvious method for making your home’s equity more liquid is to sell it. However, selling may not make sense for a variety of different reasons. Selling your home to get to the equity in it also means having to find a new place to live.

Your new home will also have to cost less than your current home. Otherwise, you won’t be able to save any of the cash proceeds from the equity of your old home.

Homeowners who don’t want to sell will often look to a loan options that use their home’s value as collateral to create liquidity. These are HELOCs, HELs and cash-out refinances. In each, lenders will offer cash proceeds to homeowners in exchange for a security interest in the home, along with a promise of repayment through monthly installments of interest and principal.

Use your equity to qualify for a home equity agreement

A third option exists for homeowners who do not want to immediately sell their house or who want to avoid debt-based options. For those homeowners, a home equity agreement (HEA) may be a preferred method for tapping into a home’s equity.

Unlike a loan, a HEA is where you sell an interest in your property to a HEA provider (such as Unlock Technologies) in exchange for cash proceeds. The amount you can receive in cash proceeds will depend on your home’s value and the amount of equity you have in it. The benefits of a HEA to sellers include:

• No loan (which means no monthly repayments of principal and interest)

• Lower credit score minimum requirements compared to traditional loans

The term of an HEA is typically 10 years, which gives you a couple of options for repaying the HEA provider. One possibility is to sell the home within that period and repay the HEA provider’s equity percentage with the proceeds. Alternatively, you can buy out the ownership interest. The HEA provider would obtain an appraisal of your home’s FMV to determine the buyout amount based on its ownership interest.

Interested in a home equity agreement?

Equity is an important financial concept to understand for homeowners looking to leverage their home’s value to reach financial goals or pursuits. When it comes to making your home equity liquid, homeowners should also be mindful of their overall finances and the benefit-risk analysis that comes with any option to tap into equity.

Carefully read and understand all terms of related agreements and seek professional help with questions.

Contact Unlock Technologies today to see what you can do with your home’s equity.