What is Equity?
When talking about your home equity you are actually referring to the percentage of the home’s value that you personally own. While your signature might be the one on the deed you technically don’t own the entirety of the home’s value until you have paid off your entire mortgage. This means you only own a share of the house’s potential value. With each mortgage payment you make you purchase more of the house’s equity while also paying the interest. This of course means the more payments you make closer to the end of the mortgage term, the more equity you are acquiring and the less will be allocated into paying off the interest.
How Does Equity Change?
When talking about changing equity it is important to remember the two variables which enable the equity to change: the appraised value of the home and the loan balance. Because the loan amount never changes until you pay it off your percentage of equity can only rise and fall based on the appraisal of the home. This means that whatever you still owe on the house is more relevant then what you have already paid.It’s important to note that a change in equity won’t change the loan amount. If your home’s value goes up or down, you will still need to pay towards the original amount of the loan.
What are the Benefits of Equity?
When considering whether to rent or buy a home, equity should be a major factor to consider. If you are owning a house you will generally gain equity every month with is a major benefits, rather then your full payment going to rent of either an apartment or a house you will be slowly adding value to your financial portfolio, for this reason there are some who joke that a mortgage is a “forced savings”.