Home equity is your share of the value of your home. It’s what you truly “own” versus the part that is owned by the bank. To make it easy to understand we will give an example. Let’s say you bought a home for $250,000 and put down $30,000. Then your equity will be only $30,000 not the full value of the house. A few years down the road you already paid part of your mortgage of $50,000, but most of that went to interest. Only the part that went towards the principle will be counted as equity. Suppose $20,000 went towards the interest then you would have amassed a total of $50,000 in equity.
Another way to amass equity
Equity can also grow if the value of your house goes up. Using the numbers above, and the value of your home increases to $300,000, your total equity would be $100,000 ( $50k for the increase of value, $30k of a down payment, 20k in monthly payments.)
Watch your equity grow every month with your monthly payments. Use a mortgage Calculator that shows you how much money is going toward your equity.
Equity is the total value of your house that you own. Only the part of the mortgage that goes towards the principle would build your equity. Interest payments do not build equity.
Why is Equity important?
Equity is an asset, so it’s a part of your total net worth. You can spend it someday if you need to. You might use it to buy your next home, to fund your retirement, or to pay for a child’s education. It’s a very large and important asset.
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Equity is the value of your home.