What Is Equity and Why Is It Good?
Equity is the difference between what your home is worth and what you currently owe if you were to pay it off. Say you bought a three-bedroom home three years ago for $200,000 and were able to put 20 percent down — a total of $40,000. That $40,000 down payment represented your equity in the home at the time of the transaction.
Now, three years later, let's say that you've paid down the original balance of your loan ($160,000) down by $20,000, making your total debt on the property today $140,000.
You've been diligent in paying down the loan, and that's great. But you have another benefit coming. Thanks to rapid appreciation of homes in your particular town, the market value on your home is now $240,000, and your equity is now $100,000.
$240,000 (Mkt. value) – $140,000 (Amt. owed) = $100,000 (Your equity)
Now, $100,000 is a very nice number and one that feels like money in the bank. Unfortunately, that's what a lot of people have been using their homes for in recent years — a bank. The example above recalls the heady days of the 1990s, when certain U.S. housing markets saw homes appreciate more than 20 percent
If you get help from friends and family, make sure they're giving you a gift, not a loan. If you need to pay back a loan, that's going to squeeze you financially, and it may have tax ramifications for both of you. Plus, the bank definitely wants a family contribution to be a gift. Otherwise, it's just like additional credit card debt — it makes a loan tougher for you to pay back and for your lender to justify.
At this writing, it's a much different picture. According to the Office of Federal Housing Enterprise Oversight (OFHEO), at the end of 2006, home prices were up 5.9 percent nationally from the end of 2005.
