Home Equity: Basics and Building Methods

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There are several terms you’re likely to hear quite a bit within the mortgage and homebuying world, and “equity” is one of them. Building home equity is an important pursuit for homeowners, helping them not only increase their stake in the home they own, but also their own personal wealth.

At VIP Mortgage Inc., we’re happy to offer several services where home equity is an important consideration, including mortgage refinancing where current equity is often a major factor. What exactly is home equity, why does it matter for borrowers and homebuyers, and how can you go about raising the equity stake you have in your home? This two-part blog series will go over several items to know in this area.

Defining Equity

Firstly, what exactly is equity. Technically speaking, equity actually refers to the homeowner’s interest in their home – that is, its market value, less any liens attached to it.

The more commonly used definition, however, is the difference between the value of your home and how much of your mortgage you’ve already paid down. If the home’s market value is $300,000 and you’ve paid down $75,000 of it, that latter number is the equity you’ve built up. Equity will often be expressed in a percentage – that is, what percentage of the home’s equity do you own? In the above scenario, you’d own 25% of the home’s equity since you had paid down $75,000 out of the $300,000 total.

How Equity is Built

Equity is built in a few ways:

  • Down payment: Your first lump sum payment toward home equity is your down payment. The higher this number, the more equity you start out with.
  • Mortgage payments: From here, continuing to make mortgage payments is the simplest way to increase your equity. A portion of each payment will bring down the principal you owe to the loan, while another portion will go toward paying down interest.
  • Appreciation over time: More below.

Time-Related Value Increase

As we noted above, one of the ways equity is built in a home is through simple property value appreciation over time. Homes are investments, and generally speaking they’re very good ones – they’re a virtual guarantee to rise in value over a period of several years as long as they’re well-maintained.

This means that the easiest way to build equity is really straightforward: Keep the home and maintain its basic state of quality. Over a long enough period, which usually only requires a few years in most cases, you’ll be able to see the value rise – which ups your equity without you really having to do much at all.

In part two of our series, we’ll go over some other tips on how to build equity in your home faster. For more on this or to learn about any of our mortgage loan services, speak to the staff at VIP Mortgage Inc. today.

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