The percentage of home equity in your home
What does the percentage of home equity you have in your home mean?
This percentage represents the money in your home that is yours.
If you have 22% of home equity in your home, that means that 22% of the total value of your home is your money, and 78% you owe to someone else, usually your mortgage company.
If you have 78% home equity in your home, that means that 77% of the total value is yours, and 33% you owe to someone else.
Why does it matter what percentage you have?
The percentage itself doesn’t matter unless you are looking to refinance or want to make sure you have flexibility in the future.
If you want to refinance
Mortgage companies like to see that you have at least 20% equity in your home in order to approve you for a refinance. This is because they want to make sure that if the home value goes down for whatever reason, that there is a buffer so that hopefully they can still recoup their money if you defaulted and they had to sell the property.
If you don’t have 20% equity in your home and you are looking to refinance, you may need to come up with difference when refinancing.
To give you flexibility
Maintaining more than 20% equity in your home is a good idea if you want to hedge against market downturns and give yourself flexibility.
Home prices go up and down with the market. What happens if you have a relatively low amount of home equity and the market drops? You could find yourself owing more on your mortgage than the home is worth. This makes it difficult to move, and you may find yourself stuck until the market improves. If you have 5% equity in your home and the market drops 10%, then the amount of money you owe on the home is more than you will recoup from a sale.