What is home equity and why is it so essential to build one?

Anbarasan Appavu

The determination of a homeowner's equity is almost universally delegated to a third-party professional appraiser. Before determining the property's true, or fair, market value, the appraiser takes a number of factors into consideration.

The most basic definition of home equity is the difference between the current market value of your home and the amount still owed on any loans associated with it. This is the proportion of the value of the home that belongs to you. If the current value of your home on the market is Rs. 50 lakh, and the amount still owed on your mortgage loan is Rs. 30 lakh, then the equity in your home will be Rs. 20 lakh (Rs 50-30 lakh). When applying for a loan, having equity in your home can be beneficial.

Home equity

A look at the factors that affect home equity

The amount of equity that a family has built up in their home is likely their most valuable asset. As a result, it is essential to have a solid understanding of the factors that influence your home equity.

You can also read our other article when you are Planning to prepay home loan

Variation in the cost of real estate

The rate of economic growth, demand and supply, and the interest rates that are currently in effect all have direct bearings on the real estate market. Real estate is consistently ranked as one of the best investments when market conditions are favourable; however, when economic conditions are unfavourable, prices tend to remain depressed for several years at a time. The value is determined not only by the state of the economy as a whole, but also by factors specific to the area, such as the local economy, the location of the property, the flow of migrants, and so on. This means that if there are positive changes in the location of your home, such as the beginning of a new business district or industrial SEZ, etc., your home equity is bound to appreciate. Some examples of these types of positive changes include:

You can also read our other article What is Moratorium

The amortisation schedule for the mortgage

The schedule of payments for the mortgage is the following factor that should not be overlooked. Your home equity will grow as a direct result of your EMI payments. Your home's equity will look different at various points throughout the duration of your loan. To determine how much equity you have in your home at any given time, take the current value of the property and deduct from that amount the values for the outstanding loan balances that are shown on your amortisation chart at the end of each year. After you have made the final EMI payment, you will have full ownership of the home. If the home is currently valued at Rs. 50 lakh, your equity in the home will also be Rs. 50 lakh.

The determination of a homeowner's equity is almost universally delegated to a third-party professional appraiser. In order to arrive at an estimate of the property's true value in the market, the appraiser takes into account a variety of aspects in addition to those already mentioned.

You can also read our other article Tips to get loan for home renovation

The value of having home equity

When you have additional loan requirements, having equity in your home can help you. As an illustration, financial institutions typically provide borrowers with a loan-to-value ratio. The LTV ratio of the value of the property should not be exceeded by the amount of the loan. Imagine for a moment that this ratio for the lending bank is 80 percent. This indicates that the maximum loan amount you can get is equivalent to 80 percent of your home's current value.

You can also read our other article Checklist needed before purchasing a home

Using this scenario once again, the maximum amount that can be borrowed is forty lakh rupees. Due to the fact that the amount you owe on your loan is already Rs. 30 lakh, the most you can borrow is Rs. 10 lakh.

Banks will still consider your ability to repay the loan regardless of whether or not you are eligible to borrow money based on the equity in your home. Your application for a loan may still be denied by the bank even if you have an irregular regular income or a temporary job.

You can also read our other article Different types of house taxes

How to increase the value of your home's equity

Even though the real estate market is affected by external factors, homeowners still have the ability to increase the value of their homes and, consequently, their equity in those homes by taking certain actions. One has an obligation to check that all of the internal components, such as the water flow, the taps, and the electrical wiring, are in satisfactory condition. You should regularly clean your lawn and make sure it stays in good condition. Put some effort into the interior of your home. There are companies that can give your kitchen or the entire house the appearance of having more space by remodelling it. Use them wisely if you are uncertain about home improvement techniques.

You can also read our other article Why homeowners should have home insurance

The initial payment, or down payment, is another crucial component. The buyer's initial downpayment brings the total amount of financing needed to purchase the property down to a lower level. Building equity in one's home begins with taking this initial step. You can speed up the process of accumulating equity in your home by increasing the size of the down payment you make. For instance, if you put down 30 percent of the purchase price of a home, you will immediately have 30 percent of that home's equity. Your EMI will go down as a result of this. You can put these savings toward prepayment of a portion of the remaining loan balance, which will further increase the equity in your home.

You can also read our other article Buying a house and Loan

Other informative and important articles to read

What is Moratorium and what should the borrowers do?

Different types of house taxes you need to be aware before purchasing a home

Buying a house, How much to pay from you while taking a home loan     

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