One of the most common reasons people choose to buy a home is that, among other things, homeownership enables them to build wealth over time. Homeownership is the highest source of household equity within the United States and this is likely why owning a home is often considered to be an essential component of the “American Dream.”
It’s important to realize that, even though you are making mortgage payments every month, your home should be considered an asset. While renters are forced to simply surrender their payments to their landlords every month, a portion of your mortgage payment will be returned to back to you. And by refinancing your mortgage, applying for a home equity line of credit (HELOC), or using various other financial strategies, you can actually access this equity before you decide to sell.
In other words, in order to answer the question “What is my current household wealth?”, you’ll need to begin by calculating how much equity is in your home. In this article, we will discuss the most important things to know about building equity via homeownership, including how to calculate a rough estimate and how you can access this equity while you’re still living there.
What is Home Equity?
Home equity, to put it simply, is the portion of your home that you actually own. When you originally applied for a mortgage, you likely needed to make an initial down payment—and that down payment counts towards your equity. However, the remaining portion of the home is, in a sense, owned by the bank or your mortgage provider. Over the course of your mortgage, which is likely 15 or 30 years, homeowners essentially “buy back” the rest of their home until they eventually reach a 100 percent equity position.
As time goes on, your home equity will increase. With each mortgage payment that you make, a portion of the payment—known as the principle—will contribute to increasing your equity position. Towards the beginning of your mortgage, the portion of your payment that is principle will be relatively small, but as time goes on, this fraction will increase. The components of your mortgage payment that do not contribute to your homeowner equity include interest payments, homeowner’s insurance payments, mortgage fees, and private mortgage insurance (PMI), when applicable.
In addition to your mortgage payments, your home equity will also increase with changes in your property’s value. If the original value of your home was $300,000 and your home increases in value to $500,000, the $200,000 increase in value will be yours to claim. While you will have to take a few steps in order for this cash to be in your hands, growing home value is undoubtedly one of the best ways to increase your wealth over time.
How Do I Calculate the Amount of Equity in My Home?
To calculate your current equity position, you’ll need to begin by determining two figures: the remaining balance on your mortgage and your home’s current market value.
Finding your remaining mortgage balance should be relatively easy—this information can usually be found on your mortgage provider’s payment portal and is updated every time you make a payment. As your mortgage balance decreases, your equity will increase.
Determining the current market value of your home will sometimes be a bit more difficult. There are many different platforms that offer rough estimates of your home’s market value, including Zillow, Redfin, Xome, and many others. Your mortgage provider might also have a preferred estimate calculator. However, these are just rough estimates and are not in any way legally binding. You won’t be able to know the “true” market value of your home until you get it appraised.
Even still, these estimates can still be very useful. If you currently have $200,000 remaining on your mortgage and the estimated market value of your home is $600,000, that means you currently have $400,000 of homeowner’s equity—in this case, you’d own about 67 percent of your home.
How Can I Access the Equity in My Home?
There are several ways to tap into the equity in your home. Two of the most common are a home equity line of credit (HELOC) and refinancing your home. With a HELOC, you can use the equity in your home as leverage to secure a loan that might otherwise be out of reach—these are especially popular for people who are hoping to make expensive home improvements.
When you refinance your home, you’ll have the option to give up some of your equity in order to get cash in hand today. There are also many other things you can do while refinancing, such as getting a better interest rate or restructuring your mortgage.
By continuing to make your mortgage payments, you’ll be able to increase your wealth and financial flexibility—certainly a great reason to become a homeowner.
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