WHAT IS EQUITY?
WHAT IS EQUITY EXACTLY? EVER STUMBLED UPON THE TERM “EQUITY” AND FELT LIKE YOU ACCIDENTALLY WALKED INTO A PARTY WHERE EVERYONE SPEAKS A LANGUAGE YOU DON’T? MOST OF THE TIME WHEN YOU HEAR THE TERM EQUITY, IT’S REFERRING TO “HOME EQUITY”. DON’T WORRY, YOU’RE NOT ALONE IF YOU’RE A LITTLE CONFUSED. LET’S DEMYSTIFY THIS BUZZWORD TOGETHER, AND I PROMISE TO KEEP IT AS PAINLESS AS POSSIBLE.
WHAT IS EQUITY? THE BASICS
THINK OF YOUR HOME AS A GIANT PIGGY BANK, BUT INSTEAD OF FILLING IT WITH COINS AND BILLS, YOU FILL IT WITH THE VALUE OF YOUR HOME.
NOW, IMAGINE YOU HAVE A PEN, AND ON ONE SIDE OF THE PIGGY BANK, YOU WRITE DOWN HOW MUCH YOUR HOME IS WORTH ON THE MARKET TODAY—LET’S SAY IT’S $500,000. ON THE OTHER SIDE, YOU WRITE DOWN HOW MUCH YOU STILL OWE ON YOUR MORTGAGE, WHICH IS $400,000. THE DIFFERENCE BETWEEN THESE TWO NUMBERS, IN THIS CASE IS $100,000. THAT IS YOUR HOME EQUITY. YEP, IT’S AS SIMPLE AS THAT. IT’S THE PART OF YOUR HOME YOU TRULY “OWN” OUTRIGHT.
HOW DOES HOME EQUITY GROW?
PAYING DOWN THE MORTGAGE: EVERY TIME YOU MAKE A MORTGAGE PAYMENT, A PORTION GOES TOWARD REDUCING THE AMOUNT YOU OWE. THINK OF IT AS SLOWLY BUT SURELY COLORING IN YOUR SIDE OF THE PIGGY BANK. THE MORE YOU COLOR, THE MORE OF THE PIGGY BANK YOU OWN.
YOUR HOME’S VALUE INCREASES: IF YOUR HOME’S VALUE GOES UP, SAY FROM $500,000 TO $550,000, THEN YOUR EQUITY INCREASES WITHOUT YOU DOING ANYTHING. IT’S LIKE FINDING EXTRA COINS DOWN THE BACK OF THE COUCH, EXCEPT THESE COINS ARE WORTH A LOT MORE.
IMPROVEMENTS AND UPGRADES: IF YOU DECIDE TO UPGRADE YOUR KITCHEN TO LOOK LIKE IT BELONGS IN A FANCY HOME MAGAZINE, OR YOU ADD ANOTHER BATHROOM, THESE IMPROVEMENTS CAN INCREASE THE VALUE OF YOUR HOME. SO, YOU’RE ESSENTIALLY INVESTING IN MAKING YOUR PIGGY BANK BIGGER.
WHY SHOULD YOU CARE ABOUT HOME EQUITY?
BORROWING POWER: HOME EQUITY IS LIKE HAVING A FINANCIAL SUPERPOWER. YOU CAN BORROW AGAINST IT TO FUND BIG PROJECTS, LIKE REMODELING YOUR HOUSE, INVESTING IN OTHER PROPERTIES, PAYING FOR COLLEGE OR CONSOLIDATING DEBT. LENDERS SEE THIS EQUITY AS A SIGN THAT YOU’RE A RESPONSIBLE HOMEOWNER AND ARE MORE WILLING TO WORK WITH YOU.
SELLING PROFIT: IF YOU DECIDE TO SELL YOUR HOME, ANY EQUITY YOU HAVE BECOMES REAL, TANGIBLE MONEY IN YOUR POCKET AFTER THE SALE. IF YOU’RE MOVING UP OR DOWNSIZING, THIS CASH CAN BE A HUGE HELP.
EMERGENCY FUND: IN A PINCH, HOME EQUITY CAN BE A SAFETY NET. SOME HOMEOWNERS TAP INTO IT FOR EMERGENCY EXPENSES, THOUGH IT’S WISE TO BE CAUTIOUS ABOUT THIS. TREAT IT LIKE YOUR SECRET STASH FOR REALLY, REALLY STORMY DAYS.
NAVIGATING THE EQUITY WATERS
JUST A WORD OF CAUTION—WHILE HOME EQUITY CAN FEEL LIKE FINDING A TREASURE CHEST IN YOUR BACKYARD, IT’S IMPORTANT TO MANAGE IT WISELY. BORROWING AGAINST YOUR HOME PUTS IT AT RISK IF YOU CAN’T REPAY THE LOAN, AND THE MARKET’S UPS AND DOWNS CAN AFFECT YOUR HOME’S VALUE AND THEREFORE YOUR EQUITY.
IN THE GRAND SCHEME OF THINGS, BUILDING HOME EQUITY IS A MARATHON, NOT A SPRINT. MAKING REGULAR MORTGAGE PAYMENTS, MAINTAINING AND IMPROVING YOUR HOME AND KEEPING AN EYE ON THE MARKET WILL HELP YOU GROW YOUR EQUITY OVER TIME. AND WHO KNOWS? SOMEDAY, THAT INVISIBLE MONEY IN THE WALL COULD TURN INTO A REAL TREASURE TROVE.
SO, THE NEXT TIME SOMEONE TALKS ABOUT HOME EQUITY, YOU CAN NOD WISELY, KNOWING EXACTLY WHAT SUPERPOWER THEY’RE REFERRING TO. HERE’S TO BUILDING YOUR WEALTH, ONE BRICK AT A TIME!
