Out of all aspects of homeownership, building equity in your home is one of the most important yet often misunderstood. Let’s dive into what home equity is and how it affects home buyers and sellers in Bel Air, MD (Harford County).
What Is Home Equity?
To understand what equity in a home means, we first need to explore how someone typically finances the purchase of a property.
In most situations, home buyers don’t have the full purchase price available upfront. Instead, they secure a loan through a mortgage lender to cover the home’s price, minus their down payment.
A buyer obtains a loan from a lender, uses that borrowed money to buy the home, and then begins building equity over time.
Market Value
Next, let’s talk about what the market value of a home represents.
Many people mistakenly believe that the market value is determined by a home appraisal, but appraisals only estimate a property’s appraised value.
An appraisal calculates the value based on factors like the home’s features, condition, age, and comparable properties nearby. While an appraised value is determined through a more formulaic approach, market value is what a buyer is actually willing to pay for the home.
The key difference is that market value is determined by the buyer’s perception and willingness to pay, whereas appraisals provide a more objective estimate. So, while an appraisal is helpful, it doesn’t set the final price that buyers will offer.
To calculate home equity, take the market value of the home and subtract the remaining mortgage balance. The difference is the amount of equity the homeowner currently holds.
For example, if a homeowner in Bel Air, MD receives an offer of $300,000 for their home and they owe $200,000 on their mortgage, their equity would be $100,000.
How Does Home Equity Affect Buyers and Sellers?
Why does home equity matter for buyers and sellers? Isn’t it just something sellers use to figure out their profits?
Equity plays a significant role for sellers, as it allows them to either use the funds for a down payment on a new home or invest in improvements to increase their home’s value before selling. Sellers can even leverage their equity to take out loans for upgrades or other needs before putting the home on the market.
Buyers can also benefit from purchasing a property from an owner with substantial equity.
A seller with more equity has greater flexibility in negotiating the sale price. While the seller wants to get the best price possible, having substantial equity could allow them to accept a slightly lower offer to close the deal faster, especially if they’re eager to move on.
On the buyer’s side, if they currently own a home and have built up a significant amount of equity, they can use that equity for a larger down payment on their new home. This can make them more competitive buyers and potentially reduce their monthly mortgage payments.
As you can see, both buyers and sellers in Bel Air, MD (Harford County) can benefit from understanding and leveraging home equity.
Need Help Understanding Home Equity and Other Real Estate Terms in Bel Air, MD (Harford County)?
If you’re unsure about what home equity, appraised value, market value, or other real estate terms mean for your home sale or purchase, reach out to us today at 443-616-5486! We’re here to help you navigate your next real estate transaction in Bel Air, MD (Harford County).