Mortgage Dictionary -> Equity
To calculate the equity on your real estate, deduct the current amount that you owe on your loan from the cash value of your home. The figure you get is the amount of equity you've built up in your home since you purchased it. As you can see, the longer you hold onto a property, the more equity you should realize.
There are many different types of real estate you can purchase that will allow you an increase in equity as you pay down your loan/mortgage:
- Office and/or apartment buildings
- Retail establishments
- Single family residential homes
- Housing developments
- Land developments for commercial or residential purposes
Building equity, no matter what type of purchase you use to build it, will enable you to make a better profit when you sell the property at a later date.
Private real estate equity has experienced massive growth in recent years. However, due to a depressed economy, the real estate market has seen a decrease recently in investments. Still, real estate is seen as one of the best and most stable investments a person can make as it almost always increases in value, or appreciates.
A good example of building equity would be in constructing a new home. First, let's say you buy a piece of property for $80,000. The house you build on the property costs $270,000 to build. Your down payment is $54,000 making your loan amount $216,000. How much equity would you have if the appraised value is $300,000? Your equity would equal $114,000. The longer you held the home, paying down your loan, the more equity you would accrue.
Oftentimes, building a home will produce more equity than buying one. However, the savvy investor can find ways of building equity either way.
Here is a good example of building equity in an already existing structure. Let's say you purchase a home worth $330,000; however, the seller of the home accepts your offer of $300,000. You make a down payment of $60,000, leaving a loan amount of $240,000. Your equity would be $90,000.
These are simple examples. When you decide to purchase a home or build one, you'll want to take into account the many factors involved such as the square footage of the home.