If you are new to the business of real estate or are looking to buy or sell a home, the terminology can quickly get confusing and overwhelming. To help you become more knowledgeable in real estate, we are beginning a new series to introduce a new word to you each week with a deep dive into the definition. Before you know it, you’ll be up there with the real estate experts!
This week’s real estate word is equity.
Equity refers to how much of your home that you actually own. It is the amount of the principal that has been paid off. You gain more financial flexibility when you have more equity in the home. Your home equity can also increase over time if the property value increases.
To understand equity, consider the home’s value minus the amount owed on mortgages or other liens (legal claim against a property). For example, if you purchased a $190,000 home with a 20% down payment ($38,000), you would have needed a loan for the remaining $152,000. So on closing day, you walk into your home with $38,000 in equity. That is the portion of the home you already “own”.
In order to build more equity, pay down the balance of your loan. When you pay extra towards the principal balance of the loan, home equity builds at an increasing rate.
Home equity can be a long-term strategy for building wealth, so try to take the necessary measures to increase your equity. Make as large a down payment as you can in the beginning, and keep a watch on your property value to see when it rises. With the right decisions, you can be “equity-rich”!
Stay tuned each week for a new real estate term to build your experience.