what exactly is the purpose of building equity in your home?

Question

i.e - staying in a house for a longer period (10+ years) vs a shorter time (2-5 years) ???

what does equity do for you? why do people say its good to build up your equity?

Answer 1

Equity is the difference between what your house is worth (today) and how much you owe on it (today). Example: if my house is worth $200,000 and I have $125,000 left on my mortgage, I have $75,000 of equity. I can't "get at" that money until I sell the house. So, it's not "money"; it's equity.

You build equity primarily through two things: paying DOWN what you owe and building UP what the house is worth. Hopefully, both of these things happen somewhat automatically over time.

In general, equity is good because it's very much like money in your pocket. In theory, you could get at it if you needed to (by selling your house) and it's sort of like an "accidental investment" people make when buying a home.

Hope that helps.

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Now... a huge opinionated digression
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My opinion: people FEEL better about equity than they really should. In theory, it is "your money" that has built up in the house since you bought it. When you sell the house, it is yours to keep. However...

Most times, you end up taking that equity and putting it right into a new home. Or, many many other people actually "borrow" that equity from a bank and just end up paying a bank interest for borrowing that equity. (See? If it were really "your money," you wouldn't need to pay interest to access it.)

Ahhh... I digress.

I think most people say to "build equity" because it's like making money off of an investment. If you bought $1,000 of Apple stock last month, it might be worth $1,200 today. That $200 that it's gone up is a lot like equity. It's money that will go into your bank account if and when you sell the property/stock.

However, look at this very real recent example from a close family member.

Bought house #1 in 1999 for $300,000.
Borrowed $270,000 to do it... so they started out with $30,000 of equity.

Sold house #1 in 2007 for $690,000.
Had paid loan down to about $240,000... so they had $450,000 of equity.

Awesome. Right? I mean they made $420,000 in eight years by investing only about $30,000 of their own money.

The rest of the story:

They bought house #2 one day later for $870,000. To do so, they put that $420,000 of equity in and then promptly borrowed another $450,000!

So, don't get me wrong. The equity is/was good. But it usually doesn't feel like "your money" unless you're planning to move out of a house and relocate somewhere else where the cost of living is significantly less.

Return to my example. This family member recently contemplated a job offer in North Texas where he knows he could get a "similar" house for about $250,000. Guess what.... had he sold house #1 for $690,000 and bought house #2 for $250, he could have paid off his $240,000 mortgage AND paid for the entire house #2 AND still had a cool $200,000 more in his bank account than the day before.

Sorry... I feel like I'm rambling (a lot). Just trying to explain what equity is, why most people encourage you to get it, and why I think that most of those people are missing a key point.

Good luck.

Answer 2

On the basis that you bought a home that is priced within your means or income to pay for is important. When you buy a home, in theory, you should be able to pay for this home in a reasonable period of time, say 15 to 20 years. When finished paying for the mortgage you will in effect have a forced savings in your home's equity. Many variables go into this scenario. If you bought into a depreciating neighborhood rather than an area that will appreciate in value. The condition of your home, will it require a large amount of input such as a roof or furnace or new windows. If you are a first time buyer and/or need an opinion from an experienced building contractor that you can trust, have them walk through the home that you intend to purchase and have them give you their opinion on the life of the structure which includes; windows, roof, foundation, furnace/AC unit, etc. It is worthwhile to pay them a small fee to give you good advice. Qualified home inspectors also provide good services. Lastly, find a good real estate agent that comes to you with good references. Ask them about the community that you are considering to buy your home... good schools, reasonable property taxes, etc. They can help you find the right home with a price that you can afford. All these things play into the equation of building good equity in a home. If you continue to rent you will continue to have zero equity, as you have no return of your money when you leave.

Answer 3

Equity is good if you need money for some reason in the future, as you can borrow it from the equity on your home.

The other thing to keep in mind is if you have zero equity in your home, and you go to sell it, you will not be able to without bringing money to the closing. Funny, you'd have to pay to sell your home.

That's why equity is important.

Answer 4

Equity is the increase in value of your home over the purchase price. You buy a house for $200,000. In two years it may be worth $300,000. You have a $100,000 in equity that you could realize if you sold it.

Time to stay in a house is determined by how the value in your neighborhood is changing. If your house is appreciating at a high rate, you might want to stay longer. Or you might want to sell to move up to a more prestigious neighborhood. Depends on your preferences and the market.

Answer 5

Equity is like a stash od cash that you can get to if you need it. Equity in a home can be borrowed against if you need it , it also equalls a larger return on your investment when you sell your house ie: you bought your house for 80,000 live in it for 10 yrs and had 30,000 in equity. You sell your house and ask 80,000 you make 30,000 in profit, basically the way it works.
also the price you pay and the price you ask-the difference is considered equity so if you pay 10,000 and 5 yrs later the house is worth 50,000 you now have 40,000 in equity

Answer 6

Equity is "the value of your home less all loans or debts that you owe on the home." So, if your house goes up in value, or you pay off the debts, you own something of increased value. You have made a "profit". you are better off.

Real estate sometimes goes up and sometimes goes down. Its kind of bad for the value of the house to be below the debt that you owe on it. That's called being "upside down." Its not a good thing. It doesn't happen much in normal economies, but our economy has had some problems lately.

People like to "buy low and sell high." They want to buy things and see the value appreciate. It makes them wealthier.

If I buy a property tomorrow, or a valuable stamp, for 200,000, and then a year later its worth 400,000, it would appear that I am 200,000 richer. I won't "realize" the gain until I sell the item, but I certainly would feel richer.

Answer 7

Building equity in your home is normally a consequence of paying down your loan. Each month a portion of your payment goes to pay the interest, a portion to pay down the loan amount.

If you pay off your loan, then all the equity is yours when you sell.

Answer 8

It's like a savings account and it gives you net worth. If you sold everthing you own (car, boat, house) and you paid all the balance off of these items, what is left is your net worth. So if you have a $200,000 home and you owe $100,000 you have a net worth of $100,000 or a $100k in equity.

Answer 9

It's adding value to your home. By doing home improvements or adding sq. footage, you are adding equity, or value. You could buy a home for $100,000....put in $50,000 worth of improvements, but on the open market your home might now sell for $200,000. That would be added equity of $50,000. Just for comparison...we live in a low-price market. We bought our house 26 years ago for $19,000. Right now it would sell for around $100,000.

Answer 10

When you build equity in your home it cuts your annual interest expense. When you get your mortgage paid down you may also negotiate a lower monthly payment so as to stop building equity so fast.

There are so many good reasons to build equity outside of your home that one should be carfeful of asking this question one-sided.