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Preparing for Home Ownership
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Building Equity in Your Home

Increased Value, Increased EquityHome equity is a result of the value of the home going above the home loan balance (the amount owed on the home). In most loan programs where you are making principal and interest payments, the home loan balance will go down as you make payments; however, there is no guarantee the value of the house will go up.

Home Values Change Over Time
The value of a home is based on market trends which may vary from one community to another. In most cases, there is a gradual increase in home value each year. Some years there may be no increase or the value may drop. In other years, the value increase might be as low as 2-3%. Remember, even if the value of your home drops, you still have to pay your home loan. But in times when the supply of housing is limited, you might even see a large percent increase in value. A rise in home value over time is called appreciation.

Example of Building EquityThe chart below depicts an example of equity building in the following scenario:

  • Purchase price: $180,000 purchased in 2006
  • Down payment: 5%
  • Discount Points: 2
  • Fees: $500
  • Average appreciation: 4% per year
  • Loan terms: 30-year fixed rate loan at 7% interest, 7.323% APR
Each bar on the chart represents dollars. All figures are approximate.

Equity Building Chart
Equity Building Chart

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