What is home equity? Home equity is the financial part of the home that’s yours.
When you buy a home, you make a down payment, and the rest of the cost of the home is covered by a mortgage. At the point at which you buy your home, the money that’s yours, that you don’t owe to anyone else, like your mortgage bank, is your home equity. So, your downpayment amount is how much equity you have in your home. That’s the amount that you don’t owe to the bank.
But, over time, you pay down your mortgage, owe less and less to the bank. The amount that you pay down on your mortgage turns into more equity – the money in your home that is yours.
Plus, your home value changes with the market. Some years, you’ll have more home equity as the market rises, and some years you’ll have less due to the market falling.
Home equity is always: What your home is worth, minus what you owe on it.
How is home equity relevant to the mortgage you choose?
Each mortgage has different fees and interest rates. Most people only pay attention to the monthly payment. Monthly payment is really important, as of course, you want to make sure you can afford to pay your monthly payment. But, it’s not the only consideration.
After all, how much equity you have in your home affects your overall net worth. Actually, for most home owners, the equity of their home makes up the majority of their net worth. So, it’s very important.
Some mortgage loans let you build equity faster, some slower. If you build equity faster, more money is in your pocket at the time of a home sale than if you had less equity in your home.
That’s why we provide this information when you look at quotes. To get the full picture. To see and protect the equity in your home and to be aware of it from the start will make you a richer homeowner.
Here’s a helpful video on equity.
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