Home Equity Explained: What It Is and Why It Matters

Home Equity Explained: What It Is and Why It Matters

Published | Written by Caitlin Spence

One of the biggest benefits of owning a home is the opportunity to build wealth over time, and you do this through building home equity. So, let’s dig into what home equity is and what it can do for you. 

What is home equity?

Home equity is the current market value of your home, minus what you owe. You’re looking for a positive number there. Any gain comes from:

  1. Paying down the principal on your loan
  2. An increase in market value over time aka appreciation

It seems simple enough, but it’s not guaranteed. Over the last 20 years, U.S. home prices appreciated an average of just 1.89% year-over-year. However, behind that average were some major price swings, ranging from +12.6% to -18.1%, according to the Urban Institute. 

Historically, Seattle’s market has appreciated faster than others. Even with the market cooling last year, Seattle homes saw an average of 7.9% appreciation from 2021 to 2022. 

What can you do with your equity?

The gradually increasing value of a home is a financial resource that can gain momentum over time. Because mortgage payments reduce the debt as the asset itself gains worth, paying on a house has been called “a forced savings account.” This is unlike virtually every other type of asset purchased with a loan, such as vehicles, which lose value while you pay them off. Simply put, building home equity increases your financial stability.

Your home's equity is part of your total wealth as a homeowner. If you decide to sell, the equity you have built over time will come back to you in the sale. Most will use that cash for the down payment on their next home. You can also leverage home equity to borrow money at a lower interest rate through a home equity loan, line of credit, or cash-out refinance. 

When drawing from your home equity, you can spend the money in any way you see fit. There are no limitations, however spending the cash on projects like renovations and home improvements could help your home to further appreciate and lead to more equity in the future.


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