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Posted: 19.05.13

The Importance of Home Equity

19.03.08 |
The concept of home equity can be a bit overwhelming for a first-time home buyer. Home equity is a subject that you should definitely understand at some point during your home buying journey, as it comes with many perks and advantages that will come in handy for you in the future.

What is Equity?

Equity is the difference between your home’s value and the amount you still owe, or simply, it’s the amount of your home that you “own.”

For example:

Your home is worth $450,000. You have $150,000 left to pay on your mortgage. The value of your home equity will be $300,000. ($450,000 - $150,000).

Essentially, your home equity is an asset - the more money you invest toward the asset, the more ownership you’ll claim over it, and the more valuable it ultimately becomes.

How Do You Build Equity?

Depending on your goals, your resources and the current market conditions, you can take an active or passive approach to build equity. Here are some ways to build home equity:

1. Paying Down Your Mortgage: The simplest way of building equity is to pay off your primary mortgage. With most home loans, you pay down your mortgage a little bit with each monthly payment. The more mortgage payments you make, the more your home’s principal balance you will pay off and the more equity you will build. Additionally, you can make extra payments against your principal which will help you save on interest and reduce the length of time it takes you to pay your mortgage.

2. Real Estate Market Conditions: The real estate market and its growth is dependent on various factors. When your property or community becomes a more desirable living location because of population growth, infrastructure, location, or future development plans, your home has a good chance of seeing an increase in home equity.

3. A third way of building equity is by adding to the intrinsic value of your home. You can do this by investing to the property itself, such as home renovations, additions like a finished basement and other types of general maintenance. This equity building method can be particularly effective when you’ve bought a relatively cheap real estate property at a discount. Homes selling at low prices but in a decent neighbourhood can retain a stable market value and allows you to slowly build smaller amounts of equity without spending more money than you are comfortable with.

Each improvement you make to your home may increase the value of your home and your available equity in the future.

Southeast Edmonton Homes