What happens to your home equity in the event of property repossession?
As a homeowner with a mortgage, it’s more than likely that you have equity in your property that has built up over the years. But what happens to that equity if your home gets repossessed by your lender? Equity is the difference between the market value of your home and your outstanding mortgage balance, so understanding what happens to this equity during repossession is really important.
Repossession occurs when you fail to keep up with your mortgage payments and your lender takes action to take control of the property. This process is typically the last resort for lenders, initiated only after all other attempts to recover the debt have failed. The primary aim of repossession is to allow the lender to sell the property and recover the amount owed.
During a repossession, your equity can be significantly impacted, depending on several factors. If the property is sold for more than the amount owed on the mortgage, any surplus (after covering selling expenses and legal fees) is returned to you as the homeowner. This is the remaining equity being realised. However, if the market conditions are poor and the property sells for less than its market value, you might recover less equity or even none at all.
The repossession process involves various costs, including legal fees, court costs and expenses related to selling the property (like estate agent fees). These costs eat into the total amount recovered from the sale and subsequently, your equity. However, you can consider selling your property yourself before it reaches repossession and potentially securing a better price, allowing you to keep more equity.
Understanding the impact of repossession on your home equity is so important and whilst repossession can reduce the equity built over years, being in control of the situation can help mitigate losses. As always, professional advice tailored to your circumstances is advisable to help your situation effectively.
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