What is equity when you buy a house?
If all you know about equity is that it's how Beyoncé wants to be paid, then I made this here video for you!!
Equity is ownership.
It can be stocks/shares of a company, it can be full ownership--it's what you OWN outright on something.
You probably think about equity all the time without even realizing it.
If you have a car note, then you have an item that has partial equity. You bought the car for 20k, you borrowed 12k, you have 8k equity. That's a little but of a simplistic formula because really equity is the difference between what something is worth and what you owe. And we all know cars decrease in value as soon as you drive off the lot.
So why is equity such a big deal when we talk about houses and real estate?
Because, it's all about the Benjamin's, baby.
Look. Here are 3 scenarios for you:
1. You see a house for $375K. The price was just dropped. The house is really worth $400K and if the sellers were a little more patient, they could get that and maybe a little more. But alas, time is money and they need to sell this house ASAP. So, you get to swoop in and buy this beauty for $375. Maybe you only put 5% down ($18,750) so your mortgage loan amount is $356,250. So on closing day. You have built in-equity. What is built in-equity? It's equity...built-...in...like...it comes with the house. So let's look at the numbers again:
House is worth $400k.
You owe $356,250 on the house.
If you turned around and sold that house the next day after closing for $400k, you'd profit $43,750.
That's built-in equity.
(Now, of course there are expenses related to both buying and selling a house so you'd probably wanna knock off $20k or so of that profit if that was real life, but still. You'd make $23k in a day and you get the example, right?)
2. We're going to travel to the future on this one because dates are hard for me to remember and this is a theoretical anyway :) So, the year is 2120. You are a seller now! You purchased your dream home for $500k. You've owned this house for 9 years and you still owe $200,000 on it. Something unimaginable happened, now you need to sell it. But, because of what happened, now the house is only worth $250k. No one will buy this house for more than $250k. So you do what you gotta do, you sell it for $250k.
What the house is worth (250k) minus what you owe on the house (200k) equals 50k.
So you have $50k equity in this house. Kinda a bummer, right? At least you're in the positive.
3. We're back in 2020! You own a house. You want to buy another house. You don't have a ton of cash, but you have $80k in equity on your house. You only need $50K to buy this next house. Guess what, you can use your equity to do so. :) And now, you're a real estate investor! Wahoo!! This is the real gem in equity, it's like your own personal line of credit.
In short, equity if power.
Did this help? Do you have more questions on equity? Use my contact form to let me know of hmu on ig @bayoucityhomes
(Can I just explain to you that maybe the most difficult part of making a YT video is picking a thumbnail for the video and I always forget to take a picture for that purpose. So instead I just take a screenshot. Of the most awkward version of me I can find bc I think I am funny?)