Getting Down to Brass Tacks: Equity Matters

Equity Matters

Homeownership sounds appealing for many reasons, and the chatter about "building equity" has you particularly intrigued. Your friends and family tell you that equity can help you build your nest egg and that all sounds good, but what exactly does building equity mean and how does it work?

In the simplest terms, equity is the difference between how much your home is worth and how much you owe on your mortgage. You build equity by paying down your mortgage over time and through your home's appreciation. In a nutshell, your money is working for you and contributing toward your financial future.

Let's look at an example to provide better perspective:

You bought your home for $150,000 with a down payment of 10%, resulting in a loan amount of $135,000. You secured a 30-year fixed-rate mortgage at 4.5% with a monthly mortgage payment of $684.03 (not including taxes and insurance).

Your scenario after 7 years of making your mortgage payments, assuming 3% per year home appreciation (based on the national average):

Amount Borrowed $135,000
Principal $17,515
Amount Outstanding
($135,000 - $17,515)
$117,485
Appraised Value  $185,003
Amount Outstanding -$117,485

Equity in Home

 $67,518

If you had zero appreciation in 7 years, you'd still have equity of $32,515:

Amount Borrowed  $135,000
Amount Outstanding -$117,485

Equity in Home

 $32,515

Now, if you continued to rent, and made the same payment of $684.03 per month, you'd have zero equity and no means to build it.

Building equity is a critical part of homeownership and can help you create financial stability. It's important to note that some markets appreciate faster than others. It's also possible for home values to depreciate due to economic conditions, your home not being kept up, or a drop in neighborhood home values.

Follow this series as we get down to brass tacks about other important topics and visit My Home by Freddie MacSM where we discuss it all.

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