Understanding Equity

Equity is the difference between the amount owed on your home and the amount your home is worth.  Your home’s worth is determined by an appraisal and is the price for which you could expect to sell the home.  If your home’s purchase price was $350,000 and is sold in the future for $400,000, you have achieved $50,000 in equity.  Building equity in your home is one of the easiest ways to save money and build your personal wealth.  Many people who find it difficult to save on a regular basis save money easily by investing in a home.  Many statistics show that the average person’s majority of wealth is directly related to the amount of home equity earned.  Homeownership can be a safe savings plan.

Equity increases as the home’s value rises and you continue to pay down the principal loan balance.  Equity typically grows over time, but can also increase soon after you purchase the home if the current real estate market is trending upward.  Several factors can create immediate equity such as another buyer who would have been willing to pay more than you to purchase it, the home has desirable features, it is in a desirable location, home values in the area increase, or inflation rises taking home prices up with it.

Equity can also be built quickly by buying a home that needs minor inexpensive cosmetic improvements.  Investing in improvements like new paint and landscaping can be a cost-effective way to increase equity with little expense.  In addition to short-term equity growth, equity is building every time you make your monthly payment.  As you repay your principal balance, your equity grows. 

Most mortgages are designed to pay off interest first and the principal later.  As your loan amount decreases, the more equity you build.  Ending equity is the final selling price minus what is still owed on the mortgage.  Your buyer’s lender will issue a check deducting any fees charged during the sale, but the rest of the money is YOURS to use for college tuitions, retirements, vacations, down payment for a new home or anything you want.