What Is Equity?

What is equity? Equity is the difference between the value of the property and what's owed on it. Richard Fryer, president of the IFEC Real Estate School, is an expert with 30 years of experience in the...

Richard Fryer, president of the IFEC Real Estate School, is an expert with 30 years of experience in the real estate field, and he knows a great deal about equity. "Equity is the difference between the value of the property and what's owed on it. And that tells you how much value you have in the property," he says. Your home equity includes your initial down payment, along with the amount of principal that you have actually paid on your house. Fryer explains that having equity is important if you want to refinance, put a down payment on another property or take out a loan. "If somebody has been in a house for 6,7, or 8 years and they are ready to buy their next house, that equity will help them make the down payment on the next house...in some cases, people use the equity when they have other situations happen. They can tap the equity if they have a medical emergency of some families wind up using equity to send [their] kids to college," he says.


The two main ways that people build equity in their home is by amortization and appreciation.




Amortization is the process of actually paying the loan off in full. An amortized loan is given out for a specific period of time, and it has to be paid off by a certain date. This is usually done in monthly installments. Mortgage loans are set up so that you loan will be paid in full over the course of the specified loan period. With each monthly payment, you pay down more principal, making your loan closer to amortization, and the more equity you will have in your home. Keep in mind, however, that your mortgage payment includes interest AND principal, and more money will go towards paying down the interest in the beginning of the loan. If you are trying to build equity, you can take steps to amortize your loan more quickly by making a larger down payment or paying more than the minimum mortgage payment every month.

Appreciation is the actual increase of the market value of your property. When the rate of appreciation goes up, your property value will go up as well. The higher the property value is, the more the property is worth. Appreciation allows homeowners to build instant equity in their homes. In high-priced markets such as Washington, DC and Boston, some people are experiencing the property value of their homes double in just a few short years, even if they paid little money down on their homes or are only paying the interest on their loans every month. If you want to build equity via appreciation, you will need to pay close attention to the neighborhood you are buying and/or living in. Make sure you research the prices for the homes in the neighborhood to see if they are continuing to go up. You can also increase your home's market value by making home improvements or performing needed repairs on your home.

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