What to Know About Home Equity and Home Appreciation
Understanding Home Equity & Home Appreciation
How Home Appreciation Affects Your Equity
If you are looking to become a first-time home buyer, you have more than likely come across the terms "Home Equity" and "Home Appreciation". These terms are crucial to understand and, as we will discuss throughout this blog, are especially important to understand when considering the current real estate market.
Defining Home Equity
In essence, your home's equity is the difference between what your home is currently worth and how much you owe on your mortgage. That difference is considered the equity that you have in your home. For example, let's say that you bought a house at $350,000 and put down 3.5% as the down payment for a 30-year fixed rate loan. At the moment of purchase, your home's equity is $12,250 dollars because that is how much you have paid toward your mortgage. Building equity is something that is exclusive to owning a home. When you are renting a home from someone else, your payment is going toward building THEIR equity.
How Do You Build Equity?
Paying the principal on your mortgage is the steadiest way of increasing your home's equity. It's important to understand that paying your mortgage is only going to build your equity depending on how much of the principal you are paying each month. The interest factored into your monthly payment will not increase your home's equity. Consult the amortization schedule that we generated using our mortgage calculator for the example home loan mentioned above.
The amortization schedule goes all the way through the 30-year loan, but for our purposes, we will just look through 2023. The monthly payments that you make toward the principal are what is building your home's equity and, with the way that the mortgage loans are typically structured, you will be paying significantly more toward your principal at the end of the loan.
Another way that your home will build equity is through the appreciation of the value of your home. Over the years, your home will more than likely not stay at the same value it had when you bought it. While home values are always subject to fluctuating either up or down, historically speaking, homeowners have experienced a 3% - 4% appreciation in home prices over time.
Graph Courtesy of St. Louis Fed
Because your home will more than likely increase in value over the years, the difference between what you owe on your loan versus what your house is worth will increase the equity in your home. A good rule of thumb to establish the equity in your home is to take the value of your home, subtract the principal you still owe on your home (you can use an amortization table to calculate how much of the principal you have already paid) and then you have your current equity.
How the Current Market Impacts Your Home Equity
Two weeks ago we talked about the odds of a housing market decline and the odds of a decline in house prices across the nation. You might have read an article recently that talks about the deceleration of home prices across the nation, but it is crucial to understand that deceleration does NOT mean a decrease in home prices. A deceleration in home prices means that the incredibly high increase in prices we have seen in recent years is slowing down, but home prices are still expected to increase year after year, as well as interest rates.
This means that as a homeowner, or someone looking to become a homeowner, you can still start building equity in your home immediately and work toward a level of financial stability that you can't achieve by renting.
Contact a Member of Our Team To Get Started on the Road to Homeownership
When considering buying a home, it is crucial that you work with an experienced agent who knows how to navigate a market like the one we are facing today. Our agents know how to win for our clients, and set them up on the path toward financial stability. Contact a member of our team today by filling out the form below to get the real estate process started the right way.