Appreciation and Home Equity: A Quick Guide

Published:
January 29, 2021
Last updated:
January 27, 2022
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Understanding appreciation and home equity are crucial when you are a homeowner. Thus, in this article, we’ll go over both and provide you a quick reference guide for the future.

In order to understand home equity and how you can build it, it helps to start with what home equity is, which is the homeowner’s interest in a home and how much they own. Or, to put it another way, home equity is the difference between the appraised value of your home and the amount owed on your mortgage. Obviously, when money is borrowed from a lender to finance a home, that lender also holds an interest in the property until that loan is paid off in full.

That said, equity in a house is initially acquired with the down payment you make during the initial purchase of the property. Over time, equity builds as your home loan balance is consistently paid off or if the overall property value increases. In general, the considered equity, what is owned, is the most valuable asset for a homeowner, which is the reason why building equity is so important. This is especially true because, later on, you can use your home’s equity to purchase a new home, to make improvements or repairs, for retirement, to secure a second mortgage/home equity loan, to open a home equity line of credit (HELOC), or even to consolidate debt.

Likewise, increasing your equity can help improve your finances. Moreover, it affects everything from whether you need to pay private mortgage insurance to what financing options may be available.

Building home equity is definitely a long-term process and builds slow on purpose, but it is worth the wait. Thus, it is important to prepare yourself for what to expect and learn how to apply your resources going forward. Of course, at this point, you may be wondering, how exactly does a homeowner build or increase their home equity then? Well, the answer is fairly straightforward.

Building Home Equity

As suggested, equity builds as a property value grows or the debt is paid off. But be that as it may, there are multiple ways to help build equity at a more active rate. For example, as loans are paid off, your home’s equity will increase as equal payments go towards the interest and the principal. That said, you can escalate this process by making additional payments each month that go specifically towards your principal. Ultimately, this will help reduce the amount of debt faster, getting you closer to a better ratio of loan to value.

If you have yet to purchase a home, then you might want to consider getting a shorter term on your loan in order to increase your home equity from the onset of your mortgage. The reason being that the longer your home loan or mortgage term is, the longer interest will build. Opting for a 15-year mortgage will likely get you a lower interest rate since you are essentially agreeing to pay off the loan in a shorter period. However, choosing a 15-year mortgage may mean that your monthly payment may be higher than it would be with a 30-year mortgage, but you’ll be saving more money overall and spending less on interest. If you have already purchased your dream home with a 30-year mortgage, then you might want to consider speaking with your lender to see if refinancing is a good option for you. For people that are disciplined and consistently invest left over cash, opting for a 30 year fixed with a lower payment and investing the savings is almost always a better long-term plan.

Yet another active way to build home equity is by making home improvements over time. Here, making any kind of renovations or adding desired features and amenities to your home will usually create property value in your home. What’s more, staying on top of basic upkeep, repairs, and maintenance can also help. Nevertheless, it is important to keep in mind that depending on the location of your home, its market value can increase or decrease. Clearly, this cannot always be controlled, but the quality of your home is something you can control, and that will ultimately help you to build value that homebuyers look for in a home.

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Benefits of Appreciation

Home value or equity grows over time. A prime example of this is when a buyer purchases a home at a reasonable price, say $300,000, and then sells it years later for a larger sum of money. In this instance, if the home sold for $450,000 – that means the difference of $150,000 is what the house appreciated. That said, in general, a home’s appreciation is calculated based on the fair market value of comparable homes for sale in the neighborhood.

However, there are a few factors that impact your home’s appreciation, like location, as briefly suggested. The location of a home is a big factor in appreciation. Here, things like convenience or easy access to transportation and proximity to good school districts matter. Plus, the available land/property and the overall environment are other things to consider. This is evident when investing in real estate located in an established or up and coming neighborhood and helps determine the rise or decline of appreciation in a home.

Another big factor is supply and demand within the housing market. When a specific market has high demand, home prices typically increase when there are not enough homes to meet the demand. Those investing in real estate jump on opportunities where they can invest. Some investors decide to buy a smaller home, turn or flip it, sell at a higher value, and pocket the profit to go into another investment.

When a homeowner or investor decides to sell or use their home’s equity, the appreciation will show how much flexibility they have to use. Waiting to sell when the market is in a good place can get owners a higher profit. However, there can be different qualifications and risk associated with this. Moreover, the market is not always predictable. Consequently, it is important to make sure home equity is understood properly. Thus, it is still in your best interest as a homeowner to speak with a mortgage professional to ensure that you choose the best option for building or using equity.

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Ready to Apply For a Home Loan?

Are you curious about mortgages, or are you ready to apply for one to buy a home? If so, Sammamish Mortgage can help. We are a local mortgage company from Bellevue, Washington, serving the entire state, as well as Oregon, Idaho, and Colorado. We offer many mortgage programs to buyers all over the Pacific Northwest and have been doing so since 1992. Contact us today with any questions you have about mortgages.

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