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Understanding Equity

In the simplest terms, equity is the difference between how much your home is worth and how much you owe on your mortgage. You can build equity by paying down your mortgage over time and through the home's appreciation.

Example:

You bought your home for $150,000 with a down payment of 10%, resulting in a loan amount of $135,000. You secured a 30-year fixed-rate mortgage at 4.5% with a monthly mortgage payment of $684.03.

Your scenario after 7 years of making your mortgage payments, assuming 3% per year home appreciation (based on the national average):
Amount Borrowed $135,000
Principal Paid $17,515
Amount Outstanding
($135,000 - $17,515)
$117,485
Appraised Value $185,003
Amount Outstanding -$117,485
Equity in Home$67,518
If you had zero appreciation in 7 years, you’d still have equity of $32,515:
Amount Borrowed $135,000
Amount Outstanding -$117,485
Equity in Home$32,515

Building equity is a critical part of homeownership and can help you create financial stability. It’s important to note that some markets appreciate faster than others. It’s also possible for home values to depreciate due to economic conditions, your home not being kept up, or a drop in neighborhood home values.

 

Tip

Did You Know making extra mortgage or principal payments will save you in total interest paid over the life of the loan and will help you pay your loan off more quickly?

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Jennifer - Blacksburg, VA

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