Variables Affecting the Dynamics of Home Equity
Appreciation and amortization are the key factors in home equity dynamics for homeowners with mortgages. Therefore, as the home goes up in value due to appreciation, and the unpaid balance goes down due to amortization, the equity increases.
Appreciation
Appreciation is the increase in value of a home and is usually measured year over year. In recent years, appreciation has been robust (19% nationwide in 2021) due to high demand and low inventory. While the news often quotes annual appreciation rates from a national or regional level, your local appreciation rate may differ.
Occasionally, you may see a chart that tracks the annual appreciation over time. But that information is more interesting than it is useful. The reality is that supply and demand determine appreciation along with location and condition. To more accurately understand what your individual home has appreciated, you’ll need to find local numbers. Your real estate professional can provide this for you.
Amortization
The amortization of a loan is consistent with regular monthly payments based on the term of the mortgage. Homeowners frequently receive a monthly statement, either through the mail or online, from their lender declaring the current unpaid balance.
If a homeowner makes additional principal contributions toward the loan, the unpaid balance will accelerate the normal amortization schedule. Additional principal payments on fixed-rate mortgages shorten the term of the mortgage. Additional principal payments on adjustable-rate mortgages will lower the payment on the next anniversary date.
Impact on Equity
The difference between the value of the property and the amount owed on in is your home equity. If there is no mortgage on a property, the equity and value of the home are the same. However, in every case, appreciation affects how much your equity grows.
For instance, let’s take at an example of a $400,000 purchased today that appreciates at 3% a year using a 90% mortgage at 4% for 30 years. The $40,000 would grow in seven years to $182,135 in equity with $91,950 coming from appreciation and $50,186 from amortization.
If the appreciation is 5% annually in the same hypothetical example, then the amount of equity changes. Equity grows to $253,026 with $162,840 coming from appreciation and the same $50,186 from amortization. The same loan amount, rate and term will result in the same unpaid balance as the example with lower appreciation.
With the considerable appreciation experienced in recent years, the values are going up fast and benefit the people who currently own a home. At the same time it makes it more expensive for would-be buyers. Another factor facing buyers is rising interest rates.
Get the Facts About Home Equity Dynamics
It is important to get the facts about the market and your individual situation to determine what alternatives you have to purchase a home in the near future. Your agent provides this objectivity and is able recommend a trusted mortgage professional to be pre-approved. For more information, download our Buyers Guide.