Building equity in your home is like a savings account – the more you put toward it, the better. Your home’s equity grows with each mortgage payment you make and with time.
According to BankofAmerica.com, you can calculate your equity based on current appraised value less any mortgages tied to your home. If your home is appraised at $400,000 and you owe $120,000, then your equity is $280,000. But that doesn’t mean you have savings of $280K; it just means that you have a general idea of how much your home will yield should you sell it at that moment, less closing costs, of course.
Lenders consider equity differently. You can begin building equity the moment you purchase your home with your down-payment. ($400K – 20% = $320K) Your loan amount would be $320K and the equity in your home would be $80,000. You can increase your equity by paying your mortgage regularly and paying a little extra every month, which speeds up the amortization of your loan.
To approve a home improvement loan or to determine whether to eliminate private mortgage insurance, lenders take the appraised amount and divide it by your loan balance to get a percentage of how much equity you have. Divide your current loan balance by your home’s appraised value, then multiply by 100. ($120K ÷ $400K = 35%) That means you own 65% of your home.
These numbers are theoretical until you sell your home. Meanwhile, watch your savings grow on your monthly mortgage statement!