Out of all of the aspects of homeownership, building equity in your home is one of the most important and least understood. Let’s look into the details and gain a better understanding of what we’re talking about by asking what home equity is and how it impacts home buyers and sellers in Los Angeles.
What Is Home Equity?
To understand what equity in a home is, we first need to look at how someone typically gains the financial footing to purchase a property.
In most cases, home buyers do not have the full amount of money on hand to outright buy a home. The buyer then turns to a mortgage lender who hopefully approves them for a home loan equaling the agreed-upon sale price minus the buyer’s down payment.
A buyer wants to purchase a home, gets a loan through a mortgage lender, and can then purchase the home using that loaned money.
Next, we need to go over what the market value of a home means.
A lot of people are under the misconception that the market value of a home is determined by having an appraisal done, but that appraisal only finds the appraised value of the home.
The appraisal value of a home is done by putting together multiple factors, such as home features, age, condition, and the value of surrounding, similar homes. An appraised value is a very straightforward, calculated way of determining value.
On the other hand, the market value is how much a buyer is willing to pay for the home.
The difference here is that the market value relies solely on the judgment of the buyers involved and their perceived value of the home. Therefore, having an appraisal done does not provide for you a number by which any buyer should pay for your home.
Finally, to determine equity, take the market value of the home and subtract the remainder of the owner’s loan. The resulting difference is the amount of home equity the owner currently has in that property.
To provide an example, a seller receives an offer on their home for $130,000 and they owe $90,000 on their mortgage. The resulting equity the owner has acquired in their property is $40,000.
How Does It Impact Buyers and Sellers?
But why does equity matter to us as either a buyer or a seller? Shouldn’t equity only be something that the seller’s worried about in figuring out just how much of a profit they’ll make on their sale?
The equity generated on a property clearly helps out the seller predominantly, as it gives them an opportunity to leverage that equity for a down payment on a new house or improving their current property in preparation for sale using a loan.
However, buyers can see benefits from a property owner with substantial equity.
Sellers with a good chunk of equity have a lot more room for negotiating a home’s sale price. A seller certainly wants to get as much as possible for their property, but that increased equity means they could be willing to take a small hit to close the deal and move on to the next chapter of their life.
A buyer who currently owns a home in which they have significant equity can take advantage of this by committing to more earnest money or a larger down payment. As you can see, there are great positives for both buyers and sellers when it comes to home equity.
Help Understanding Home Equity and Other Real Estate Terms in Los Angeles
If you’re confused by what home equity, appraised value, market value, or other real estate terms mean for your home purchase or sale, contact us today at 562-881-9811!