What do you really gain when your mortgaged house has appreciated in value and have gained equity?
Answers:
Yes, he's made $100,000! He can sell the house and make a profit, or take out up to $100,000 in a home equity loan to use for remodeling or buying another home, or he can do nothing at all and keep paying down the original loan balance (the principal.)
Many people get into trouble when they pull out the equity, buy cars and boats, and then the market starts declining. Now he's mortgaged the house for $340,000 but if he were to sell it the house is only worth $325,000 for instance.
It's not wise to take out the money and blow it on toys. It's smart to invest in more real estate or remodeling the home so that it would be worth even more if he sells.
In my humble opinion, that is...
Many lenders will do cash-out refinances so he could tap this additional equity if he wanted to. If nothing else he has an asset that is worth way more than he paid for it. And, if something bad happened to him he could sell the home, converting the equity into cash.
Gained Equity = The difference between what your real estate property is worth today minus the outstanding mortgage? If you were to SELL the home you would get the EQUITY or the difference once the existing mortgage is PAID off. You can also utilize your Home Equity to obtain funds to make another RE purchase or investment this will cost you some monthly payments depending on the term you select. You can also get a FREE consultant with your local Banker or Credit Union to learn more. Real Estate is a great investment. GOOD LUCK! :-)
Hi,
Yes, your friend is 100K richer than he was four years ago. He could do a cash-out refi, and buy another property, or use the money to fund an asset of some type. An asset is something that makes a positive cash flow each month. I've purchased rental properties this way, and it is paying off very well. So yes, the money is real. It's just how smart you are with that equity that gets a person ahead of the game.
He hasn't made a single dollar. He has paper profit right now, and won't have real profit until he sells. Sure, he can borrow against the house's current market value, but is that profit? Not really: It's leverage against the promise of future profit.
To use an extreme example, let's assume he cashes out $100K in equity. What happens if some catastrophic event occurs that makes property values decline drastically, perhaps to the point that he now has more debt on the property (his original mortgage plus the funds he borrowed against the "equity" in the house)?
You don't actually profit until you sell the property and you now have cash-in-hand. Until then, you're just leveraging *potential* future value.
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