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Reading Into Home Equity
By kevin | March 17, 2008
Home Equity is a big buzz word when it comes to buying foreclosures and bank foreclosed real estate, and for good reason. Home equity has a huge amount to do with how much a piece of real estate will go for at foreclosure auction. But to understand how to read into a property’s home equity to determine whether or not it’s worth pursuing at auction, you have to first understand how it is accrued and what it means.
Home equity is the term used to describe the amount of money that has already been paid off on a mortgage loan. When someone buys a mortgage loan, and makes a down payment, that down payment is immediately considered home equity-it is an amount of the mortgage already paid off. The same goes for each successive mortgage payment. If a homeowner makes a $20,000 down payment on a home, and over the course of the next several years pays off, say, $36,000 worth of the loan, then the homeowner has a total of $56,000 in home equity to their name.
When it comes to bank foreclosed real estate, home equity takes on a special meaning. If a homeowner defaults on their mortgage loan, the lender will move to file a foreclosure so that they can make up the remaining amount owed in debt on the loan. This amount does not include the amount of home equity, which is money already paid off by the lender. Therefore, the more home equity a property has, the less the lender needs to collect from its foreclosure sale in order to satisfy the full amount of the debt. This in turn means that a property with more home equity can be sold for less at auction with no loss to the lender.
For investors looking for the best deals on bank foreclosed real estate, finding homes with the most home equity often means finding the properties that will be sold for the least at auction. Some key things to look for are homes that have had mortgages instated for many years. This usually means a great deal of equity has already been paid off. Avoiding homes that have new mortgages will help you avoid ending up at auctions where prices will be sky high.
Topics: Home Equity |