How to Explain Home Equity

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Home equity is all about the value of your home increasing. Buying a home can be a great way to include a long-term asset into your retirement plans. To keep on track with that retirement, it's important to know where you stand. Knowing how to calculate home equity is equally important.

Learn the definition of home equity. Essentially, it means the amount of money that potentially could be liquidated from a piece of property. In other words, home equity is the amount of money that the house is worth minus the amount of debt still outstanding on the property. For example, if you buy a house for $400,000 with $50,000 as a down payment and a $350,000 mortgage, you have $50,000 in home equity. One of the goals of home-ownership is to increase that equity as you both pay down the mortgage and the property appreciates.

Learn to consistently check on the fair market value of your home. An appraisal on the property costs money, so see "Additional Resources," below, to find a reputable online source. This site reviews sales, purchases and foreclosures in your area and neighborhood, and gives you a good picture of what your home is currently worth.

Know that home equity can be gained and lost. Depending on a variety of factors, your home equity may not always go up. In a down market or a down economy, you may see the fair market value of your property shrink, and ultimately, your home equity shrink. This is part of the housing cycle, and there will be ups and downs. Liquidating in a down market is a bad idea, so your best bet is to be aware of your fair market value and ride out the storm.

Bolster your home equity by making improvements on your property. Some examples of improvements that add value are additions, remodels, new rooms and cosmetic improvements. By making changes and upgrading your home, you are investing in your future asset. Continue to make improvements to consistently improve your equity.

Speak to a financial adviser regularly about your goals and how your real estate fits with those goals. Having a good deal of home equity will ensure a large chunk of liquid cash at some point--cash that may be used for a part of your retirement.

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