A Guide to Equity
Buying a home provides security and peace of mind to many new homeowners, giving them a safe, secure place to call their very own. Buying a home can also give people a sense of accomplishment, creating benefits that range from a sense of permanence to a feeling of belonging to the surrounding community
Owning a home also gives people the opportunity to invest in their future through the equity that’s built up from the moment the new homeowner step through their front door. In most cases, the down payment alone immediately provides an opportunity to save and build a nest egg for short term use or long-term goals.
What is Equity?
Home equity is the difference between you’re the amount of your mortgage that you still owe and the amount you have already paid. If you put down 15% on the purchase of your new home, then that 15% becomes equity in your newly purchased home.
You don’t have to buy a new home to create equity. If you have been living in the same home and making mortgage payments for 10 years, you will have created 10 years’ worth of equity in your home.
The total amount depends on several things, such as your home’s value and the real estate market, but making your mortgage payments every month will build equity in your home that can be left alone to grow or used for immediate needs.
How is Equity Created?
Home equity begins to build the moment you purchase your home and begin to make payments. Although you actually own your home, your lending lender holds an interest in the home by way of your mortgage. As your payments reduce the amount of interest your lending institution has in your home, the portion you own outright grows and your equity grows with it.
There are other ways you can increase your home equity. Improvements, additions, and upgrades increase the value of your home and increase the amount of money that you’ll keep after selling your house even if you have only made a few mortgage payments.
For example, if you remodel your kitchen and your home’s value increases by $30,000, that’s $30,000 more than you owe your lender. That home upgrade helped to build the equity you have in your home.
Why is Equity Important?
The equity you build in your home can help with a lot of things now and in the future. Home equity can help your credit score, will likely ensure you are approved for other loans and credit opportunities and provide a safety net you can use in emergencies.
For long term goals such as retirement, the equity you have in your home can continue to build until you either sell the home or decide to access the equity through a home equity loan or line of credit.
If you decide to move, either when you retire or sooner, the equity you’ve built in your home goes with you. You can use some or all of that equity to purchase a new home either partially or in full.
The equity you take from your previous home is money you have built up just as if it were a savings account or investment. You can choose to reinvest it in a new home or put some down and use the rest to travel, send your kids to college, or invest and use for living expenses during retirement.
Can You Lose the Equity in Your Home?
Of course, how much equity you build depends on how much you pay towards your loan. However, it can also be affected by outside forces such as the real estate market and home values. However, dips in the market are never permanent and patience pays off.
By waiting out recessions or market slumps, you can protect, and even increase your equity while you enjoy the peace of mind and stability that homeownership brings.
New or Used Homes – Where is the Best Place to Build Equity?
The answer is, it depends. By working with real estate and lending professionals, you can take advantage of their experience and knowledge to make smart investment decisions.
Although most home values increase, the best approach is to let the professionals help to guide you to the best values, long term prospects, and solid investments available in your area’s housing market.
With the current low interest rates and the possibility that they may go even lower, this is a great time to start building your own equity in a home. No matter how much you have available to invest in a downpayment, your local real estate professionals can help you find a great place to start building your very own nest egg.
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