What Is Equity?
Real Estate Agent Explains Equity
For example, let’s see how equity could change over three years on a fictional home:
|Year 0 (a):||+$12500||– A down payment of $12,500 is made|
|Year 1 (a):||+$8331||– Total mortgage payments for the year (principal only)|
|Year 1 (b):||+$5000||– Market value of the home increases this year|
|Year 1 (c):||-$500||– The home depreciates (some minor things wear out)|
|Year 2 (a):||+$8670||– Total mortgage payments for the year (principal only)|
|Year 2 (b):||-$2000||– The market causes the home value to decrease this year|
|Year 2 (c):||-$500||– The home depreciates (some other things wear out|
|Year 3 (a):||+$9024||– Total mortgage payments for the year (principal only)|
|Year 3 (b):||+$5000||– Market value of the home increases again this year|
|Year 3 (c):||-$500||– The home depreciates (some more things wear out)|
|Year 3 (d):||+$3000||– The homeowners renovate their home|
You can see how equity is affected by all manner of events: mortgage payments, market forces, depreciation and even renovations. Of course the only way to find out how much a home is worth is to sell, so the values represented here are hypothetical. You can’t sell your home every time you do some work or something breaks down, but it stands to reason that if your hot water tank failed and that tank costs $750, then your home is worth about $750 less than it was when that item was working. And if you get brand new windows, your home will be worth more than it was before. You can add the value of those windows to the cost of the home (give or take of course).
A simple calculation of equity is:
(value of home) – (amount owing on mortgage) = (equity)
So for example, a home is worth $463,500 and the owners who have been living there a couple of years just received a statement from their bank that they still owe $425,300.
$463,500 – $425,300 = $38,200
If the home owners sold now, their equity would be $38,200. That is amount of money they would get once the mortgage was paid back from the proceeds of the sale.