May 16th, 2019 8:49 AM by Jackie A. Graves
Just as a road trip is more than simply
reaching your destination, homeownership has many benefits beyond
simply providing you with a roof over your head. One of those benefits is the
opportunity to build home equity—but what exactly is equity and how can you
simplest terms, equity is the difference between how much your home is worth
and how much you owe on your mortgage.
Take a look at this example:
Let's say you
bought a $250,000 house with a down payment of 7% (approximately $17,500). That
would result in a loan amount of $232,500. You secured a 30-year
fixed-rate mortgage at 4.5%, resulting in a monthly mortgage payment of $1,178
without taxes and insurance.
your home equity, subtract the amount of the outstanding mortgage loan from the
price paid for the property.
the time you buy, your home equity would be $17,500 or the amount of your down
payment. For perspective, once you have paid off your mortgage you have 100%
equity in the home.
So, how do you build equity?
equity in two ways: by paying down your mortgage over time and through your
Paying your Mortgage
you will make monthly mortgage payments that will decrease the amount you owe
on your loan.
with our previous example, let's look how your equity would increase after ten
years of mortgage payments. After ten years, your unpaid principal balance is
down to $186,208.
the formula from above, your total equity is now $63,792. Note, this is your
total equity only if the value of the property remains the same as it was ten
years ago – which is where appreciation factors in.
course of your mortgage, it is unlikely the value of your property will remain
the same as when you originally purchased it. The national average for home
appreciation is 3% per year. If you live in a neighborhood where property
values are going up overall, consider the possibility that your home equity may
increase as well.
example, if your home appreciated by 3% annually, your home's value would
increase from $250,000 to $335,979 after ten years. That's a 34% increase in
the formula (home value) – (principal owed) = (home equity) you would have
$149,771 in equity.
important to note that some markets appreciate faster than others. It's also
possible for home values to depreciate due to economic conditions, lack of
upkeep, or a drop in neighborhood home values.
equity is a critical part of homeownership and can help build financial
stability over time. To learn more about homeownership, be sure to follow our spring
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