What Does a Hot Market Mean for My Home’s Equity?

Even though it might cause headaches in the short term, the long-term financial benefits of owning a home are transformative, offering greater economic security for you and your loved ones down the road.

As 2021 draws to a close, and housing market demand continues its steady descent from its COVID-era peak, a lot of homeowners are left wondering: what did that hot market mean for me? Can I take equity out of my home?

First, let’s quickly recap what home equity is, and how you, as a homeowner, stand to benefit from it over time.

Home equity: a recap

There are many financial benefits to homeownership. Chief among them is the principle of home equity—which is basically the difference between what you owe on your property and how much your property is currently worth.

How do you calculate home equity?

It’s a simple equation, really: market value minus amount owed on mortgage equals home equity amount.

Here’s a quick example. Let’s assume that you’ve owned your home for quite some time, and that you were able to make a generous down payment on the property when you bought it.

Let’s also assume that the market value of your property is currently $250,000, and that you still owe $150,000 toward your mortgage.

Want to hazard a guess as to what your equity might be? That’s right—$100,000!

Market influence on equity

According to the U.S. News & World Report, the average home saw an increase in equity to the tune of $26,300 in 2020.

Accumulatively, that’s over $1.5 trillion in home equity for positively impacted homeowners—all in a market fueled, the U.S. News & World Report says, by “[l]ow mortgage rates, strong demand, and a record low inventory of homes for sale nationwide,” conditions that fed cutthroat competition for available properties and increased home prices significantly.

All of this to say: if the market is doing well, then it could yield major dividends for you and yours on the equity front.

Putting that equity to use

Want to take equity out of your home? This is by no means an exhaustive list, but here are a couple of avenues you could explore.

One is a home equity line of credit, or HELOC, something we’ve written about extensively in the past.

HELOC is a line of credit secured by the equity you’ve already got in your home. It gives you a line of credit that you can borrow against during a certain period, rather than a lump sum of cash up front. And it comes with a limit on what you can borrow.

Another is a home equity loan, which entails the following, according to the Federal Trade Commission:

  • Borrowable amount is usually restricted to 85% of your home’s equity
  • Loan amount is determined by additional factors like credit history, your home’s market value, your income, etc.
  • Lender can foreclose on you if you default on your payments

And there you have it. A quick primer on the benefits that home equity can bring in the context of a hot market.

Eager to put that equity to use? Make wise decisions, and don’t forget, markets aren’t always consistent—don’t expect the benefits of this “hot” period to last forever!