Tuesday, September 24, 2013

Real Estate Word of the Day: Equity

From time to time I will be working with  home buyers and be struck by the confusion in their eyes when I talked about escrow or earnest money. These can easily be confused with other real estate and mortgage terms like down payment or cash to close. This confusion is a reminder that simple terms I use everyday as a REALTOR® might be unknown to others. It is totally understandable because most homebuyers do not buy houses everyday.
There are so many terms that could possibly confuse a first time home buyers and repeat home buyers alike, that I thought an online glossary of real estate terms might be helpful. From time to time, I have written about these essential terms. It is a series of posts for the first time home buyers where I explain some of the most often used (and sometimes confusing) real estate terms. This way you can skip buying that big “how to buy a house” book and have a quick resource at your fingertips. Today’s Real Estate Term is:

EQUITYThe amount of ownership one has in a property is the equity. This means if a home is appraised at $200,000 and the homeowner owes the bank $150,000, he would have $50,000 in equity.

An FHA buyer initially has very little equity because of the very low down payment required for the loan (usually 3.5%). Whereas a conventional buyer, who puts down 20% or more on the home, will have a greater percentage of equity.

It is important for a first time buyer to understand this term because it can be used in property descriptions. A home that is in a “negative equity" position is a short sale. This means the homeowner owes more to the bank than the home is worth in the current real estate market.

Other real estate ads will describe homes as an “equity builder”. This is where a buyer can build equity in the home faster by making improvements like finishing a basement so the home increases in value more quickly than if nothing is done on the home.

Another term used by REALTORS® in advertisements is “sweat equity”. This is similar to an equity builder but often describes a home that could need significant work to bring the property to its full value.


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