Your Home = A Garden, Your Equity = The Fruit

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.

‍Down Payment = Seeds‍

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.‍

Mortgage Payments = Regular Watering‍

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.

Natural Appreciation = Sun & Rain‍

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.