The word “equity” may sound complicated, but it is actually one of the greatest benefits and rewards to owning a home. Equity is a way to build wealth. Home equity is like a forced savings account. With every mortgage payment you make, you earn equity. It is like making a deposit in the bank every month. As the value of a home increases, so does the equity in the home.
One thing is for sure, renters do not have access to equity. Only the landlord gains value in a rental property.
Here is a simple example:
If you bought your home for $135,000 and now it is worth $185,000. And, if you only owe $117,000, you would have $67,000 in equity.
Current value: $185, 000
Outstanding loan amount: – $117,000
Equity: $67,000 “savings account”
The longer you pay your mortgage, the more equity you gain. And in today’s economy, the amount of home equity grows faster than the interest in savings accounts. Here’s how it works. Every time a homeowner makes a mortgage payment, part of the money goes to pay back the loan and part goes towards equity. In the beginning the equity is a small part of the mortgage payment but as time goes by the equity increases as the loan amount decreases.
Later on equity comes in handy for large purchases and high cost items. A home equity loan is a loan only available to owners and it is based on the amount of equity in the house. These loans are often used to consolidate other debt with high interest rates (like credit card debt), to finance large expenses (such as college or a wedding), or to start a business. A word of caution, be as careful taking out a home equity loan as you were when you purchased your home. Stay smart.