Equity

What is equity? 

Equity refers to the value of ownership in an asset. It represents the difference between the market value of an asset (like a house) and the amount still owed on any loans or mortgages related to that asset. For example, if your house is worth $800,000, and you still owe $500,000 on the mortgage, your equity in the house is $300,000. 

How does a home equity loan work? 

As the name suggests, a home equity loan is a loan given by a lender based on your home’s built up value. Here your property serves as collateral (a form of security) in the case of you being unable to pay your loan. 

Suppose the current value of your home is $900,000 with $400,000 left to pay your mortgage. Your equity in this property is therefore $500,000. Lenders typically allow you to borrow up to 80% of the equity amount, meaning that you could borrow up to $400,000 ($500,000 x 0.8) using a home equity loan. 

Is it possible to have negative equity? 

Yes it is possible to have negative equity. Having negative equity means that you owe more on an asset than it is currently worth. 

For example, if you took out a mortgage to buy a house, and the market value of the house drops significantly, you might end up owing more on the mortgage than what the house is worth. It's a challenging situation because selling the asset may not cover the outstanding debt, and refinancing or selling might be difficult.