As you consider buying your first home and start the research process, you will likely come across the term “equity” used a lot. It is a frequently cited reason to buy a home, and mentioned along with words like “wealth,” and “financial freedom.” So, we know equity is a good thing; but what exactly is it? In this post, the first installment of our “in 300 words or less” series, we will explain equity once and for all! Ready? Let’s dive in!
The fastest way to describe equity is with a very simply math equation:
the market value of your home – the mortgage balance = equity in your home
For example, let’s say your home is worth $350,000, and you owe $250,000 on your mortgage. The difference, or amount you have already paid, is $100,000 in equity. So, it follows that the longer you have been paying your mortgage, the more equity you will have in your home. Additionally, home values tend to rise over time, which means that the market value will also likely increase. This in turn leads to – you guessed it – more equity!
Equity is incredibly empowering for a homeowner as it provides a way to save up money without working to consistently put money into a savings account. Some of the most popular ways to tap into equity are: to make improvements or additions on your home to increase its market value, as a down payment on a new home, for retirement, to invest in other areas, or to pay off outstanding debts with an interest rate higher than your mortgage.