Building equity

As you plod along through loan repayment, those mortgage payments may seem like a burden. The only light at the end of the tunnel is that (faraway) day when you pay it back in full. Take heart, because really there is something magical happening each time you send off that check, you are building equity.

You see, long before that day when you fully own your house, you will have built equity, which is basically wealth that you have invested in the house. That equity will allow you to finance other purchases, as we’ll see.

When you make a down payment upon purchasing your house, that cash is transformed into equity, or ownership in your home. After that, you build equity by making monthly mortgage payments.

In most cases, when you first begin repayment, your mortgage payment goes mostly towards paying down the interest. Later, more of the mortgage payment goes towards the principal. Note that it is only the money you put toward the principal that is converted into equity; the interest money goes in your lender’s pocket.

Homeowners are considered to hold significant equity after they own more than twenty percent of the house’s worth. Usually, after twenty percent ownership, a homeowner can take out a home equity line of credit.

Alternatively, they can select a home equity loan. Either way, interest rates are relatively low with home equity credit. Also, the money that you put toward paying that interest can often be deducted at tax time.

It is good to know that you can leverage your homeownership long before you own your home outright.