If you’ve owned your home for several years, you’ve probably heard people talk about home equity. But what exactly is it, how does it work, and why does it matter?
Home equity is the difference between your home’s current market value and the amount you still owe on your mortgage or other loans secured by the property. It’s also one of the ways homeowners can build wealth over time, particularly as property values increase and mortgage balances decrease.
How Does Home Equity Work?
Let’s look at a simple example. Imagine you purchased a home five years ago for $100,000. Today, that same home is worth $150,000. Your home’s value has increased by $50,000. That’s called appreciation, and it’s one way you’ve built equity in your home.
But there’s another piece to the equation: your mortgage balance. Let’s say you still owe $80,000 on your mortgage. Here’s how the numbers work:
| Amount | |
|---|---|
| Current home value | $150,000 |
| Remaining mortgage balance | $80,000 |
| Your home equity | $70,000 |
In this example, you have $70,000 in home equity. That equity reflects both the increase in your home’s value and the portion of your mortgage principal you’ve paid down.
The formula is simple:
Home Equity = Current Home Value − Outstanding Mortgage and Other Loans Secured by the Home
Does Home Equity Increase Over Time?
Home equity can grow in two primary ways. The first is through appreciation, which happens when your home’s market value increases. As property values rise, the difference between what your home is worth and what you owe may become larger.
The second way is by paying down your mortgage. Each payment toward your loan’s principal reduces the amount you owe, gradually increasing your ownership stake in the property. Over time, a combination of appreciation and mortgage payments can help homeowners build substantial equity.
Of course, home equity isn’t a fixed number. It can decrease if property values decline or if you borrow additional money against your home.
Why Does Home Equity Matter?
For many homeowners, equity represents a significant financial asset. Understanding how much equity you have can be particularly useful when you’re thinking about making a move, whether that means purchasing a larger home, downsizing, or exploring ways to buy your next home before selling your current one.
Moving to a Larger Home
If your family needs more space or your housing needs have changed, the equity you’ve accumulated may help fund the purchase of your next home. When you sell your current property, the proceeds remaining after paying off your mortgage and covering selling expenses may provide a substantial portion of your next down payment. Learn more about Moving Up in Connecticut.
Downsizing to a Smaller Home
For homeowners considering downsizing, accumulated equity can create new opportunities. Selling a larger home may provide the funds needed to purchase a smaller property, reduce monthly housing expenses, or make a move that better suits your current lifestyle. Explore your options for Downsizing in Connecticut.
Buying a Home Before Selling Your Current One
Some homeowners would prefer to purchase their next home before putting their current property on the market. Depending on their financial circumstances, they may explore options such as a home equity line of credit (HELOC), which allows qualified homeowners to borrow against a portion of their available equity. We’ll explore how a HELOC can work when buying before selling in another article.
How Do You Find Out How Much Equity You Have?
Calculating your home equity starts with knowing your home’s current market value and the outstanding balances on any mortgages or other loans secured by the property. Subtract those balances from the estimated market value, and you’ll have an estimate of your equity.
Keep in mind that your home’s market value isn’t necessarily what you paid for it or what an online estimate suggests. Local market conditions, recent comparable sales, your home’s condition, and buyer demand all influence what a property may be worth today.
It’s also important to distinguish between home equity and the cash you would receive from selling. Your final proceeds will depend on your mortgage payoff, selling expenses, and other transaction costs.
What Could Your Home Equity Mean for Your Next Move?
Whether you’re considering a larger home, downsizing, or moving because your current home no longer fits your needs, understanding your financial position can help you make informed decisions about your next move.
Next Steps
If you’ve owned your Connecticut home for several years, its current value may be quite different from what you originally paid. Understanding your home’s current market value is the first step toward determining how much equity you’ve built and what opportunities it may provide.