Equity is your share in an asset if sold for current value. Equity has many definitions depending on the context of how it is used, but there are some important points to know about how equity pertains to the housing market.
When you have a mortgage on a home, equity is the amount you have paid off your loan. Essentially, it is the amount or fraction of the house that you own. This number can fluctuate depending on the market price of your property, but when thinking about a long-term mortgage, it is best to consider overall goals and the future of your investment.
Your mortgage equity begins when you place a down payment on a home. On a $200,000 home loan with a 20% down payment, your equity is $40,000. As you make payments, your investment will grow, but there are other ways equity can fluctuate.
Housing Market Growth
The housing market can fluctuate, causing your equity to change along with it. Continuing the example, your $200,000 home has increased in value by $50,000 in the first few weeks.
This is great because you have a $200,000 loan on a $250,000 house, leaving you with a larger equity. What $40,000 you had paid has increased 25% to $50,000 in equity. You do not have the extra $10,000 going towards your mortgage, but your stake in the overall investment is worth more.
Home Prices Drop
If there is a sudden drop in price of your home, you can lose equity. If the price of your $200,000 home drops to $150,000, then your equity will decrease by 25% to $30,000. You will still be paying towards the $200,000 loan, but you will not be earning equity.
When home prices drops, refinancing loans and re-assessing your mortgage might be the safest choice to get back on track towards gaining equities.
Selling Your Home
If the housing market is stable and your home is the same price month to month, every loan payment will gain you a larger stake.
Say after three years you have paid off $100,000 of your loan and your home is still worth $200,000. If you get a new job in a different city or just want to sell your home, your equity is 50% of the home price. You can sell your home and cash in the equity you have built up over the years.
Overall equity is important because it is how you can track the fairness of your investment. Home prices shift so it is important to be accounting your assets properly. We at American Capital Mortgage Group want you to be happy with your home loan. Give us a call to talk about your future.