Whether you’ve never heard the phrase ‘home equity’ before or you have a little familiarity, here are the ins and out of what it means and how this asset can help your financial outlook.
Essentially, home equity refers to your portion of the value of your San Diego home, and the amount of this figure is important because it is included among your assets when determining your net worth. If this sounds confusing, think of it this way: if you are paying all cash for your San Diego home the value of your home equity is your purchase price assuming you purchase the home at market value. Of course, because most people seek a lender to borrow money from when they purchase a home, so initially their home equity would consist of their down payment.
To provide further clarification, let’s use the example of a house that has just been purchased for $400,000. In this case the buyer is getting a loan and putting a down payment of 20% at the time of purchase. So, the equity in the home would be $80,000. Since this amount is the percentage of the cost of the house that has been paid down, this is the amount of the house that is actually owned by the individual and this will be figured among their assets.
As you pay the amount that you owe on your home each month, you are paying off your total debt and thereby increasing your equity. Since this amount of money is considered an asset that belongs to you, it can be used down the road to buy another home or invest in other important things like education or retirement. While paying off the amount owed on a home is a considerable investment, if the value of your home increases, this means that you’ll still owe the same on it (minus whatever you have paid down with your mortgage) but your home equity will have automatically increased.
Now let’s use the example of a San Diego home that was purchased in 2010 for $300,00 with the buyer putting down 20% or $60,000. Now in 2016 the owners have paid down their mortgage by another $30,000, so the owners contribution is $90,000. Let’s also say that due to rising prices in the area over the past 6 years the home is now worth $500,000.
$500,000 current value – $300,000 purchase price in 2010 = $200,000 equity from appreciation
$60,000 down payment + $30,000 loan amount paid off = $90,000 equity from sellers contribution to home purchase
$200,000 + $90,000 = Total Equity of $290,000
They now have an equty of $290,000 and the large majority of that equity just came from holding onto the property as property values tend to rise over time.
As an asset that is part of your financial net worth and can be used down the road to fund other investments, home equity is a very useful term to know when it comes to purchasing your San Diego home. If you’re on the market for a San Diego home and are considering your options, please contact me.