January 20, 2022

What Exactly is Home Equity?

Home Ownership

Homeownership has many benefits beyond simply providing you with a roof over your head. One of those benefits is the opportunity to build home equity - but what exactly is equity and how can you build it?

Put simply, equity is the difference between how much your home is worth and how much you owe on your mortgage.

For example, let's say you bought a $250,000 house with a down payment of 7% (approximately $17,500), resulting in a loan amount of $232,500. At the time you buy, your home equity would be $17,500 or the amount of your down payment. For perspective, once you have paid off your mortgage, you have 100% equity in the home.

So, how do you build equity?

You build equity in two ways: by paying down your mortgage over time and through your home's appreciation.

The first way, by paying down your mortgage, entails making monthly mortgage payments that decrease the amount you owe on your loan.

The second way, through your home's appreciation, factors in the value of your property. The national average for home appreciation is 3% per year. If you live in a neighborhood where property values are going up overall, consider the possibility that your home equity may increase as well.

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, lack of upkeep, or a drop in neighborhood home values.

Building equity is a critical part of homeownership and can help build financial stability over time.

This article was originally published on FreddieMac.com.