What is Home Equity: Introduction, example and overview-1

Home equity is now-a-days becoming quite a common term.
In this article, I’ll attempt to explain it and list the advantages and disadvantages of the home equity.

Home Equity is a concept that originated in the west - for that instance, most of the financial concepts originated in the west. However, home equity has a special significance for the western culture because that fits well into their living and social culture.

What options are available for home buyers?

Imagine yourself as a young salaried individual or a shopkeeper or businessman.
You are working or running your business in a new city, other than your native town, and now you are thinking of buying a house for your own.

One option is to buy the home with your own money – which you may have accumulated from your earnings.
If you don’t have enough money to buy a house on your own, then another option is to take a mortgage or home loan, as most of the individuals do today – committing an EMI repayment for long durations like 115 or 20 or 25 years.

Instead, there can also be a third option, which will also help you in planning your retirement income or pension money – this is the option of home equity.

How does Home Equity Work

You buy a house on loan from a bank, building society or mortgage company. You take this loan while you are working and earning. Say you take a 20 year long home loan when you are 30 years old. Hence, if everything goes well, then at the age of 50, you will finish up repaying all your EMIs and will become the proud owner of your home.

Suppose you have to retire at the age of 58. However, due to your home loan repayment, you were not able to save enough for your retirement. You may have opted for retirement plans like Employee provident fund or private retirement schemes, but at the end you discover that the returns from your retirement schemes are not worth meeting your cost of living after you retire. This may be due to inflation, or bad returns from your retirement scheme or due to dis-savings because of house loan repayments.

So what do you do? You are now the owner of the house. So when you retire, you can use your house to pay for your retirement money.

Continue to Part II of this article