You often hear that owning a home can help build financial stability, but what does that mean and how does it happen?
The main way to build “wealth” through homeownership is equity. Let’s break down what exactly equity is and how it benefits you.
What is home equity?
Home equity is the difference between the current market value of your home and the amount you would owe to pay off your loan. To estimate your equity, subtract your mortgage balance from the appraised market value of your home. For a more precise calculation, contact your servicer to determine the final payoff amount needed to pay off your balance.You can build home equity by:
- Making regular payments toward your loan principal (i.e. paying your mortgage each month) and;
- Home appreciation, which is a positive change in the value of your home.
Why do home values appreciate?Home values are often driven by local market conditions, so it’s important to note that there is no guarantee that a home will appreciate. However, our quarterly Forecast shows that today’s housing market is strong with house price growth expected to increase to an annual rate of 5.5% in 2020. Let’s look at what’s driving this growth:
- Housing demand – Mortgage rates in 2020 hit record lows. As a result, many potential homebuyers made the jump to homeownership to take advantage of today’s low rates.
- Housing supply – Home sales have increased dramatically in 2020. Consequently, there are more buyers looking for homes than there are active listings on the market.
What happens to equity when you sell your home?
Your home equity is part of your total wealth as a homeowner. When you decide to sell your home, the equity that you have built over time will come back to you in the sale. For example, if you paid off your $200,000 mortgage and sold your home for $250,000, you would receive what is left of the $250,000 after closing, which you could use for a down payment toward a new house.
To learn more about home equity and appreciation, visit My Home by Freddie Mac®.