There are many upsides to being a homeowner, but one of the biggest financial benefits of home ownership is building real estate equity. Homeowners can think of their home as a giant savings account that they continue to build when they pay their mortgage each month. Learn the basics below about home equity, why it is important and how you can use it to contribute to your long-term financial stability.
What is Home Equity?
The concept of home equity can be complex, but it boils down to this: your home equity is simply the portion of your home that you truly own. This means that when you buy a $200,000 home, you don’t automatically have $200,000 of equity in it. Instead, your equity would be the down payment that you initially made at the closing table.
How Can I Increase My Home Equity?
Simply paying your mortgage every month increases your equity by increasing the percentage of your home that you own outright. As you continue to pay off your home in monthly installments over the life of your mortgage, the amount of your mortgage payment that goes toward your principal balance increases. This means that over time, the rate at which you will gain equity in your home will accelerate. To further increase your equity, you can make accelerated monthly payments or pay larger sums toward your principal balance. Doing this will help decrease your loan amount and increase the percentage of your home that is financially yours. Bonus—with this tactic you can also pay off your home faster and pay less in interest.
What About Price Appreciation?
Other than paying off your loan faster, your home can also build equity all by itself through price appreciation. If your home’s value increases while you own it, whether it is because of fluctuating home prices or improvements in your home or neighborhood, your home has built equity all on its own. For example, if you purchase your home for $150,000 and ten years later, for a variety of reasons, it is now worth $160,000, you have increased your home equity by $10,000 without any money out of your pocket.
What Can I Do with Home Equity?
Your home equity becomes part of your total net worth, and a home is usually a homeowner’s largest financial asset. The more equity you have in your home, the more you will get out of it when it comes time to sell. Many homeowners choose to pay off their homes before retirement, and then live in their homes throughout their retirement years mortgage-free, or even sell their home to finance their needs during their retirement.
However, if you don’t plan to move or sell your home, it is also possible to borrow funds against the equity you have in your home using a home equity loan or home equity line of credit. In this process, your home becomes your collateral for borrowing money from a lender. However, these options are risky, as you are borrowing against your largest and likely most important asset—your home.
It is important to understand that your home isn’t just a building, it’s an investment that can have substantial implications for your financial future. Understanding home equity and how it can help you build your wealth as a homeowner can help you become financially secure for years to come. The NC Housing Finance Agency has many resources to help first-time and move-up buyers buy a home they can afford. For more information, visit www.nchfa.com/home-buyers.