Unraveling The Secret Of Home Equity
There are a lot fancy terms and acronyms thrown around in the world of real estate and mortgage that can sometimes sound intimidating. Home equity is definitely one of those words, but it’s important to understand what it is and how it works to fully understand if purchasing a home is the right choice for you. Here are the ins-and-outs of home equity.
What Is Home Equity?
Essentially, home equity is the difference between the appraised value of your home and how much of your mortgage you have left to pay off. Most people take out a mortgage from a lender to purchase a home, so their equity would equal the amount of their down payment and whatever amount they have paid off of the mortgage since they purchased it. If you have completely paid off your mortgage, than the home equity is the value of your property. This is an important figure because it is included among your assets when determining your net worth.
You’ve purchased a house in Tempe, Arizona for $200,000 with a conventional mortgage and put 20% down, or $40,000. That means that your equity would equal that $40,000, as this is the amount of the house that is actually owned at the time and would be figured into your assets. With each mortgage payment, your equity will grow.
How It Works
As we have seen in the above example, as you pay off the amount that you owe on your mortgage each month, you are decreasing your debt and increasing your home equity. Since your equity is considered an asset that you own, it can be used to do things like buy another home or invest in education or retirement. And, if the value of your home increases during your repayment period, your equity will have automatically increased since you still owe the same amount as before.
Home equity can be a valuable tool when making financial and investment decisions down the road, so make sure you fully understand it when making home buying decisions.