Hi Guatam,
Glad to hear from you.
There are two ways that this could happen:
1. As the value of the house increases then by default so does the equity that the owner holds in the house. As a result the owner of the house (the borrower) can tap into that increased equity through a home equity loan.
So as an example lets say that someone buys a home for $1 Million putting down 20% ($200,000) and borrowing the remaining $800,000 by taking out a mortgage. So at this point the borrower has $200,000 worth of equity in the house.
Next lets say that the value of their home increases over the next two years by 20% to $1.2 Million. Now the homeowner has $400,000 in equity in the house.
Depending on the financial situation of the borrower, many times they can now tap this additional $200,000 in equity by taking out what is known as a home equity loan or line of credit for $200,000 or some portion thereof.
2. They can refinance their mortgage at a more favorable rate. All else being equal now that (using this same example) this house is worth $1.2 Million, assuming everything else remains constant, the borrower should be able to get a more favorable loan. This is because of the increased amount of equity they hold in the house, and therefore the increased quality of the asset that is securing the loan.
Good luck with your new job. Let me know if this does not make sense or if you have any questions.
Best Regards,
Dave
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