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What is Home Equity?

What is Home Equity?


Did you know that purchasing a home could actually help you build your wealth? If you are currently renting a property, you might want to look into purchasing a home within your budget when your next lease is up.  Purchasing a home can be easier than you think with a first-time homeowner’s loan and will help you build your wealth in the long run!


What is Home Equity? 

Home equity is the difference between what you owe on your mortgage and what your home is currently worth.   The amount of equity in a house or its value fluctuates over time as payments are made on the mortgage and the housing market factors into the current value of that property.


Why is Home Equity Important?

Having home equity is important because it’s a mechanism by which you can convert assets into cash, should you need it. Additionally, you can often borrow against the equity in your assets such as the case with a home equity loan or a home equity line of credit.  And while your equity isn’t money in the bank it might be better to borrow from yourself than have to take another large loan out from the bank.  


What Does it Mean to Build Equity? 

Building equity is how much higher your home value is than the remaining debt on the home.  You can build equity in a number of different ways, but the most common way is to focus on paying your monthly mortgage and putting a down payment on the home when you purchase it.  For example, the bigger your down payment, the more equity you’ll immediately have in your home. Say you buy your home for $180,000. If you put down $5,000, you’ll owe $175,000 on your mortgage. That leaves you with $5,000 in equity. If you put down $20,000, you’ll owe $160,000 on a home worth $180,000.  To put it in simple terms, the more money you pay into your home, the more equity you will have.  


You can also build the equity of your home by increasing its property value.  If you put more money into projects around your home, invest in a new HVAC System or put an addition on your home, you can help raise the market value of your home, which will  in turn, help you build equity.  


How is Equity Calculated? 

Home equity is calculated by how much money you have paid into your home versus how much your home is worth.  You can figure out how much equity you have in your home by subtracting the amount you owe on all loans secured by your house from its appraised value. For example, you are a homeowner who owes $140,000 on a mortgage for your home, which was recently appraised at $400,000. That means your home equity is $260,000.


Most people, especially those that are new to the home search process are unaware that purchasing a home could actually help build wealth! If you are interested in learning more about home equity, feel free to reach out to one of our loan officers at West Penn Financial!