As you consider buying your first home and start the research process, you will likely come across the term “home equity” a lot. It is one of the most frequently cited reasons to buy a home (“build up home equity”), and mentioned along with words like “wealth,” and “financial freedom.” So, we know home equity is a good thing; but what exactly is it? In this post, the first installment of our “in 300 words or less” series, we will explain equity once and for all! Ready? Let’s dive in!
The fastest way to describe equity is with a very simply math equation:
the market value of your home – the mortgage balance = equity in your home
For example, let’s say your home is worth $350,000, and you owe $250,000 on your mortgage. The difference, or amount that belongs to you, is $100,000 in equity. So, it follows that the longer you have been paying your mortgage, the more equity you have in your home. Additionally, home values generally go up over time. This in turn leads to – you guessed it – more equity!
Equity grows as you live in your house and pay your mortgage each month. As a homeowner, this means you are building up savings without worrying about consistently putting money into a savings account.
Once you have built up equity in your home, it becomes a part of your net worth. When needed, you can tap into – or withdraw – equity from your home with a cash out refinance. Some popular reasons to tap into equity are: to make improvements or additions on your home (further increasing its market value), to invest in other property, or to pay off outstanding debts with an interest rate higher than your mortgage.