Home equity is the value or portion of your home that you truly own. It is the difference between the market value of your home and what you still owe the lender on the mortgage. Home equity changes over time based on the housing market and the amount you have paid against your principal.
When you first purchase the home, your initial amount of home equity is determined by your down payment. Each time you make a mortgage payment, part of the payment is applied to your principal, and paying down the principal on your mortgage builds your home equity. As time goes on, through a process called amortization, you gain momentum and pay an increasing amount on the principal over time to gain even more equity.
For example, if you took out a mortgage for $250,000 and made a 20% down payment, the beginning home equity would be $50,000 (the value of the down payment). Over time, (as long as the value of your home doesn’t fall) and you continue to make monthly payments, part of which is applied to the remaining principal of $200,000, your home equity will rise.
What can I do with home equity?
Home equity is a valuable asset. With the equity you have built in your home, you can:
· Get a home equity loan
· Refinance for a cash-out loan
· Get the cash back after you sell the home
· Apply the equity toward a down payment on your next home
Home equity is often a safety net that homeowners can turn to in case they need to refinance to pay for large expenses like college tuition, home improvements, emergencies, or consolidation of debt. Ultimately, home equity is a valuable asset, and there’s a lot you can do with it. It takes good financial stewardship over time to build home equity, but that effort is rewarding.
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