Types of Real Estate Equity

There are several types of equity as it relates to real estate. Basic equity is simply the financial interest a homeowner or property owner has in a property. Equity is calculated by subtracting the mortgage or lien amount owed on the property from the market value of the property. With other forms of equity, it can be calculated differently.

One type of real estate equity is sweat equity. With sweat equity, you do not actually have a financial interest in the property. Time spent contributing to the property enhancements and improvements can be considered sweat equity. If the time you spend working on the home actually increases the value, the time spent will equal your invested "equity".

Habitat for Humanity is one organization, which utilizes sweat equity for people who would otherwise be unable to purchase their own homes due to lack of funds. When a person cannot qualify for a mortgage because they do not have sufficient credit or income, they can work for up to 500 hours on the building of their home. These 500 hours constitutes the person's sweat equity and Habitat for Humanity families and partners assist with the construction. Once the home is built, the new owner makes interest-free payments to the organization. Habitat for Humanity provides a Fund for Humanity to build homes for other people who cannot qualify for regular interest-bearing loans.

Financial equity is the standard type of real estate equity where the payments made towards your mortgage finally provide for actual ownership of part of the home. As soon as you owe less on your mortgage than what the property is worth, you have developed equity. Financial equity in your home can be used in several ways. Since the equity is considered an asset, you can use it as collateral for another loan. Essentially a home equity line of credit is like a revolving credit line.

Often time a person's home is their most important and worthwhile asset, so using your home's equity to provide for major expenses such as education costs, hospital bills and home improvements. A home equity line of credit is not recommended for minor expenditures or trivial items like vacations. Based upon the amount of equity in your home, you will be approved for a specific credit limit. The credit line is calculated by taking a certain amount of the home's appraised value and subtracting that amount from the balance owed on the mortgage. The bank will also consider the borrower's ability to repay the loan.

Denver Real Estate