Equity- What is it? Why does it matter?
Using financial terms when speaking can often result in your listener identifying with Charlie Brown as he listened to his teacher, “whomp, whamp, whomp”. Unless you discuss finances on a regular basis, these terms can take a bit longer to digest; terms like equity. So, let’s take a minute or two and discuss what equity is and why you should care.
In short, your home equity is how much of your home you own as a dollar figure. Your home is worth a specific dollar amount, this is how much it is appraised for. And if you are still paying your mortgage, you owe a specific dollar amount. To determine your home equity, take the amount your home is worth and deduct the amount you owe; the dollar figure that is left is how much of the home you actually own—your home equity. The goal is to have a positive number that consistently increases.
The good news is that as a homeowner you control one of the biggest factors in increasing your home equity—paying down the principal balance of the loan over time. The principal is the amount that you borrowed to purchase the house and does not include the interest. Building equity is often a slow climb that continually increases. However, this is not guaranteed because while you control half the equation (paying towards the principal), you don’t have full control over the other half (how much your home is worth). Should the housing market change drastically, your home’s value could decrease which can negatively affect your equity. But on the flip side, there are things that you can do to build the equity other than paying down the principal. For example, making upgrades that increase your home’s appraised value will build your equity.
For the most part, home ownership can be a long-term strategy to build wealth. But one of the biggest contributing factors to this is time; homeowners who stay in their homes longer are more likely to gain equity. So, no matter where you are in the timeline of your investment-- just starting out or decades into home ownership; know that if you take care of your property then it will likely take care of you. Just simply enjoying your house as your home.