The purchase of a new home requires learning all about various aspects of homeownership (financial, legal, and practical) that can be overwhelming to a first-time homebuyer and homeowner. As part of our ongoing All About series, LGI Homes seeks to provide an easy-to-read and easy-to-understand resource that goes in-depth on a variety of subjects connected to buying a home. Today, we explore the world of property equity and how it will play into your experience of buying and owning a home.
What is equity?
Equity is best described as being the financial interest or cash value of your house, minus the current balance on your home loan.
Who builds equity?
Anyone who owns their home builds equity. Equity is not built by those who rent.
How do I build equity?
Simply by paying your mortgage on time and in full every month! Each month that you pay your mortgage, that payment goes toward your equity. The closer you get to paying off your mortgage, the more equity you have.
How does equity benefit me if I move?
Equity is most beneficial when you decide to sell your house. At this time, the current value of your home is weighed against how much equity you have in the home and how much money you still owe on the house to calculate how much profit you stand to make. The more equity, the more profit. For example, imagine you purchased your home for $100,000, you have $25,000 in equity and the current value of your home is $200,000. You’ll sell the home for $200,000, use part of the sale to pay off the remaining $75,000 on your mortgage and walk away with $125,000 in profit from the sale.
How does equity benefit me if I don’t sell my house?
If selling your house isn’t in the cards for you, equity can still be beneficial. Banks will let you borrow against your equity to take out a secondary loan to use as you wish. So, if you have $25,000 in equity and want to use that $25,000 to pay for your child’s college tuition, you can borrow it from the bank, but your equity will return to $0. You will begin building equity again each month you pay your mortgage. While this doesn’t necessarily save you any money, it is easier than taking out a separate loan and is an option if you know you plan on staying put in your current house long-term.
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