“Don’t throw away your rent money every month. Start building equity” they say. But, if you don’t understand equity at its core, these words likely flow in one ear and out the other. So, if you’re considering buying a home, or already own one, make sure you understand the foundation of homeownership—equity. Let’s get to it. 5 mins or less. No lectures. (And a really sweet analogy to make it simple.)
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Put simply, equity is the amount of home you own. It’s the difference between how much your home is worth and how much you owe, shown as a dollar amount. Simple, right? Before we dive into how you increase your equity, let’s use an analogy of a garden to keep it simple.
If your home is a garden, your down payment is a pack of seeds. When you buy a house and pay your down payment, you’re planting your seeds into a small patch of dirt. If you have a down payment of $20,000, these seeds are your first $20,000 in equity. The place to start.
For a little while, not a whole lot happens with your equity, much like seeds in a garden. You’re not going to be harvesting any fruits yet. In these early times, your monthly mortgage payments will primarily be going toward the cost of borrowing money, called interest. (This is normal, and the premise of almost any mortgage.) With each month’s payment, less and less of your payment will be going toward interest, and more will be going toward your mortgage balance, or principal. And that’s where sprouting begins.
While you’re paying down your mortgage balance, there are a few natural factors that also help your seeds (aka equity) grow. Sun and rain are akin to the natural increase in value of your home. Things like neighborhood value going up (called appreciation) and market conditions both impact your home’s value. Based on historical data, we can see that home values naturally rise over time. And when your value rises, you know what that means.
All loans are subject to underwriting or investor approval. Some restrictions may apply. This is not an offer of credit or a commitment to lend. Guidelines and products subject to change. Rates and terms may vary depending upon risk analysis, collateral, and other factors. Call 844-645-6937 for details and qualifying information.
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