The U.S. Federal Reserve Board’s Survey of Consumer Finances showed home owners had an average financial net worth of $184,400, while renters’ net worth was just $4,000. (Net worth, by the way, is the best measure of wealth available. It is simply the dollar amount you get when you add up everything of value you own and subtract everything you currently owe.) Call it good planning or forced savings–either way, it works. A home is clearly the largest financial asset most people have, and this is because of the home equity position they have in it.
So, just what is home equity and what is its role in making home buying a smart financial decision? Home Equity is the portion of your home’s value that you actually own. That is, it’s the money that would go into your pocket after you sold it, paid off your mortgage, and handled any selling expenses.
There are two ways to build home equity. The first is by paying down your mortgage. Unlike most purchases, when you buy property, you’re only required to pay part of the sales price up front. This is your down payment. For the remainder, you take out a loan that you agree to pay back in monthly installments over a period of years. This loan is called a mortgage loan because you’re pledging your home as collateral–you have, in fact, mortgaged your home. A portion of these monthly payments applies toward principal (the original amount you borrowed), and the other portion goes toward interest (the cost of the loan). Over time, as you pay back the principal, you gradually start to own more and more of the home’s value. In other words, you build up home equity.
Many people are surprised that on a thirty-year mortgage it can take as long as twenty-two years to pay off half the principal. This is because early in the life of a mortgage the majority of your payment goes to interest. You see, the interest you pay on a monthly basis is directly proportionate to the amount of principal you owe. Thus, as your monthly payments reduce your principal, the percentage of interest you pay on a monthly basis is reduced as well. The net effect is that the closer you get to the end of your loan term, the more principal debt you pay off.
The Rivers Team is here to answer all of your questions and help you get into your new home. If you are looking to relocate to or within Tallahassee and for all of your Tallahassee Real Estate needs, call The Rivers Team at (850) 297-2255 or visit us at www.RingTheRivers.com.