Understanding home equity

One of the top motivations for homeownership is building wealth through equity. Homeowners know that their equity will build through the years, but do you know how this happens? Below, we discuss two factors that increase equity for homeowners.

Monthly Principal Payments

Equity is the difference between what you currently owe and the value of your home. Simply making monthly payments increases equity, according to a recent paper published by the Urban Institute, Home Ownership is Affordable Housing. Author Mike Loftin states that:

“The principal portion that reduces the loan balance builds the homeowner’s equity. In doing so, the principal payments behave like an automatic savings account. The principal payment is not money going out; it is money staying in.”

Mike Loftin

So making your monthly loan payments increases your equity and, thus, your wealth. But that’s not the only factor contributing to financial gain through homeownership. Equity also increases as your home appreciates in price.

Home Appreciation

According to CoreLogic’s Homeowner Equity Insights Report, equity is growing rapidly amidst record home price appreciation. The report states that the average equity gained over the past year for mortgaged homes was $33,400, with a 6% increase in total homeowner equity in the past year. The current average equity of mortgaged homes is over $216,000, and current U.S. homeowner equity has reached nearly $1.9 trillion!

Benefits of Increased Equity

This is good news because not only does equity build wealth, it provides flexibility for you as a homeowner. When you do choose to sell, the equity you’ve built up comes back to you in the sale. This can allow you to upgrade to a bigger or better home. Coupled with low mortgage rates, today’s high levels of equity could make it the ideal time to sell.

Bottom Line:

The fact of the matter is, as your home equity increases, your financial stability follows. Homeowner equity has more than doubled over the past decade, adding to the many benefits of owning your own home.