Here’s Why Building Equity in a Home is a Good Thing
Understanding the value of homeownership extends beyond just having a place to call your own. Central to this is the concept of building home equity, which can significantly improve your financial future.
Whether you’re a first-time buyer, a seasoned homeowner, or simply curious about the financial perks of owning a home, understanding equity is key.
In this post, we’ll focus on why home equity is so beneficial for homeowners and how you can use it. We’ll also explore practical ways to gauge and enhance the equity in your home, and how this can be a huge stepping stone to your next property.
What is home equity?
Home equity is essentially the portion of your property that you own outright. It’s calculated as the difference between the current market value of your home and the remaining balance on your mortgage. This means that as you pay down your mortgage, the equity – the part of the property you own free of any debts – increases. Home equity is a significant financial asset, representing a homeowner’s stake in their property.
How does home equity work?
Each mortgage payment you make reduces the amount you owe and typically increases your equity. Additionally, if your home’s market value appreciates over time, your equity grows even more. This growth in equity can be a powerful financial tool, offering opportunities for further investments or as a safety net in your overall financial strategy.
Home equity growth example
Let’s look at an example of how home equity can grow over time. Alex bought a home seven years ago for $235,000. For this simplified example, we’ll assume Alex used a VA loan with no down payment. Here’s how the equity in Alex’s home might have increased:
Initial purchase 7 years ago: $235,000
Home appreciates at 6%* annually: $16,907 each year (approx.)
Current estimated home value: $353,353
Estimated total equity from appreciation: $118,353
Estimated amount of 4% loan paid off in 7 years: $32,760
Total equity from appreciation and loan payoff: $151,113
*This example uses an averaged conservative appreciation rate estimate of 6% per year to account for pandemic-era appreciation spikes. In many cases, home values have increased at a much faster rate.
