Equity is not always present in our homes.

It is the value of your house after deducting the loans and other encumbrances on it. 

Home Equity Example 1

You think your home would sell for $650,000 based on the recent sales in the neighborhood for similar houses in a similar condition. You have a first mortgage of $550,000 and a second of $125,000. You got the second to perform maintenance, add a bathroom and pay off some accumulated credit card debt. It seemed like a good idea at the time because the market had been going up.

Now you owe $675,000 on a house that would sell for only $650,000. If you subtract what you owe from what it would sell for, that sum is less than zero. That means there is no equity in the property. In this instance there is nothing to protect and should you happen to file for bankruptcy you do not need to use an exemption to protect this asset.

Home Equity Example 2

Lets look at the same house that sells for $650,000. This time there is only a first mortgage of $600,000. In this case, there is $50,000 of equity in the home. If you filed bankruptcy, would you need to exempt this asset? Maybe not, more information is needed to determine how to answer this time.

Costs of sale would be at least 7%. Therefore we can subtract $45,500 from the $50,000 leaving only $4,500. Are there any property taxes due? If property taxes have been assessed, they are due even if the payment date is in the future.  Look at your property tax statement or see if you can find the assessment online at your county’s website. This tax would need to be paid from the sale of the home and should be deducted before there is any equity to consider.

Are there any homeowner’s association’s dues to pay? Are there any mechanics liens or contractor’s liens? It seems likely that we will end up with another zero sum.

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Image Credit: Leo Reynolds

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