Most people who refer to building equity mean doing so in a home. It is the dollar amount that the person owns in his primary residence. The benefits of home equity include a greater net worth and the ability to obtain a loan for lower interest rates by using the house to secure it. Making payments on the mortgage is not the only way to build home equity.
When purchasing a home, most people must borrow a large portion of the money needed by obtaining a loan called a mortgage. Throughout the life of the loan, the homeowners make payments to the lending institution. The total of the down payment and any payments the homeowners have made is the equity in the home. Stated another way, it is the difference between the all payments made and the outstanding mortgage.
Building Home Equity
The first way a person builds home equity is by making continuous payments on his mortgage or by making a very large initial down payment. Market value is also pertinent to equity. Purchasing in a home where large municipal projects will raise the market value in the future will also increase home equity. Many home improvements also increase market value, thereby increasing equity in the home.
Home Equity in Net Worth
Home equity is important in calculating net worth. Net worth is the sum of all assets minus the sum of all debts still owed. So, the amount of home equity accumulated will add to net worth. The amount of the mortgage for which the home owner is still making payments will deduct from overall net worth.
Home Equity Loans
Many banks will extend a home equity line of credit to homeowners. The interest rates on this type of loan, because it is secured by the home, are usually much lower than if the person borrowed money without any type of collateral. Using the loan to make home improvements can not only help to build home equity, but the interest may be tax deductible.
- "Personal Financial Planning, Theory and Practice"; Kaplan Schweser; 2009
- "Income Tax Planning for Financial Planners"; Langdon, T, Grange, E., Dalton, M.; 2009
Christine Aldridge is a financial planner who has been writing articles related to personal finance since 2011. She has bachelor's degrees in political science from North Carolina State University and in accounting from University of Phoenix. Aldridge is completing her Certified Financial Planner designation via New York University.