Home equity is the value of your home that you own outright, minus any outstanding mortgage or other liens. In other words, it’s the difference between what your home is worth and what you owe on it. For many homeowners, building home equity is a key financial goal, and for good reason. In this blog post, we’ll take a closer look at what home equity is, how it’s built up, and why it’s a good idea to build it up.
What is Home Equity?
As mentioned earlier, home equity is the value of your home that you own outright. It’s calculated by subtracting the outstanding mortgage balance and any other liens or debts against the property from the current market value of the home. For example, if your home is worth $500,000, and you owe $300,000 on your mortgage, your home equity would be $200,000.
How is Home Equity Built Up?
Home equity is built up in two ways: through paying down your mortgage and through appreciation in the value of your home. As you make mortgage payments, you’re gradually paying down the balance of your loan, which increases your equity. At the same time, if your home’s value goes up, that also increases your equity. For example, if your home is worth $500,000 today, and next year it’s worth $550,000, your equity has increased by $50,000.
Why is it Good to Build Home Equity?
There are several reasons why building home equity is a good idea:
It’s a form of forced savings. By paying down your mortgage, you’re essentially putting money into a savings account that you can access later. When you sell your home or refinance your mortgage, you’ll be able to tap into that equity and use it for other purposes.
It can help you qualify for better rates and terms on loans. If you have a high amount of home equity, lenders may be more willing to offer you better rates and terms on other loans, such as a home equity loan or line of credit.
It can provide a safety net in case of financial hardship. If you run into financial trouble, you may be able to tap into your home equity to help make ends meet. For example, you could take out a home equity loan to pay for unexpected medical expenses or to cover living expenses during a period of unemployment.
It can help you build wealth. As your home equity grows, so does your net worth. This can be especially important if you’re approaching retirement and looking for ways to build wealth for your golden years.
In conclusion, building home equity is an important financial goal for many homeowners. By paying down your mortgage and taking advantage of appreciation in your home’s value, you can build up equity over time. This can provide a number of benefits, including forced savings, access to better loan rates and terms, a safety net in case of financial hardship, and the ability to build wealth. If you’re a homeowner, consider making building home equity a priority.