Home Equity – Building Value in Your Home
One very important aspect of real estate is the understanding of equity and how it works. Equity is the money value that is built in a property or home over time. It is the difference between the appraisal price of a home and the amount of any unpaid mortgage left on the home. This means for example, if an individual purchases a home for $200,000 with a down payment of $20,000 and a loan of $180,000, the amount of equity in the home is $20,000. Purchase price – loan amount = equity.
How It Works
There are a couple ways in which home equity can be built. One way equity is built over time is via appreciation of the property. Purchasing a home is an investment, and that investment needs time to grow. Despite the current recession, statistically a homes value will double every 10 years. For example, a home bought today for $100,000 will statistically be valued at $200,000 in 2020. A home is one of the largest investments you will make in your lifetime and will continue to grow as long as you own it.
Another way in which equity can be built is through the continual payments of principal on a mortgage loan. A principal payment is the money that is paid that doesn’t go towards the interest of the loan, but instead goes to reducing the amount owed on the loan. The more principal that is paid to the loan the more the equity builds.
Unless the down payment is a significant percentage of the home’s value, the monthly mortgage payment won’t change a great deal. However, any extra that is paid to the principle will increase the amount of equity. In order to get the maximum benefits out of your monthly payments, be sure to talk with your lender.
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