The Importance of Understanding Your Home’s Equity

There are many significant advantages to owning a home. It gives you a place to settle down, saves you from paying ever-increasing rent, and may offer you some great tax savings. One of the biggest benefits is that, as time passes and you make monthly payments, you’re building up equity. But what does that really mean to you? It’s important to understand what home equity is when you’re buying or selling a home. Here’s what you need to know about building home equity, how it increases, and what you can use it for.

What Is Home Equity?

Calculating your home’s equity is simple. First, figure out what your home would sell for if you put it on the market. Then, look at your mortgage statement and see how much you still owe on your mortgage. Subtract your loan balance from the price you could get for your property. The difference is the amount of equity you have in your home.

How Does Home Equity Work?

Equity in your home typically builds over time, although it can decrease during a real estate downturn. When you make a down payment at closing, that amount is your first equity.

When Does Home Equity Increase?

There are two key ways your equity will increase. The first way is through your monthly mortgage payments. As you pay down your loan, even if it’s a bad credit home loan, your equity increases. For example, if over five years’ time you pay $5,000 on your mortgage loan principal, that will usually equate to around a $5,000 increase in home equity.

Another way is for your house to increase in value. If there’s a housing boom, or if the neighborhood you live in gets popular, you may see a big increase in home prices. This also increases the amount of your home’s equity. In this example, if you bought your house for $200,000 and home prices increased by 10% a year, in two years’ time your home would be worth $242,000, which would be a $42,000 increase in equity.

Average Homeowner Equity Gained in 2021

According to the latest CoreLogic Equity Report, the equity in mortgaged real estate increased more than 31 percent in the third quarter of 2021 over the previous year. What does that mean for homeowners? A boost in property values by $56,700 – the largest average annual equity gain in more than 11 years.

How Can It be Used?

Homeowners can use their equity to finance other important purchases or expenditures. They can also cash it out in a cash-out refinance. Tapping into home equity is helpful and smart in certain situations. You can use your equity to secure a home equity line of credit (HELOC) to pay for home renovations or repairs, send your kids to college, purchase a new vehicle, pay down other, high-interest debt, or anything else you need. If you decide to sell, you can cash out the equity and use it as a down payment on your new home.

Building home equity is a big benefit to homeowners, which is why it’s important to understand the term. Increasing the equity in your home should be one of your goals, as it offers you financial security and an option for borrowing against it, or cashing it out, if you need the funds.