Surprise - You Might Be Equity Rich!
Equity rich is defined as having over 50% equity in the value of your house. If you own a $400,000 house and you have over $200,000 of equity you are considered house 'rich'. States like FL, CA, WA, AZ have upwards of 60% average for net equity.
How is equity built? Either the house goes up in value, or you pay back the money you borrow in the form of principal repayment. Most house equity is from appreciation. This chart shows how much equity has grown.
That's Great, but again how does equity grow? It's a little like the compound magic that works to create any form of wealth, but most consumers don't realize that the only way that their house will ever increase their net worth - is through appreciation.
Example: You buy a house for $400,000 and there is no appreciation. In 30 years (based on a 30 year note) you will have transferred $400,000 of your own money (down payment and principal) into the house. That is balance sheet neutral. That's your money you moved from your checking account to the investment in your house. Principal is always balance sheet neutral.
Appreciation is where the wealth magic happens. It's new wealth because it comes directly into your personal wealth through the house.
Did you know on a 30 year fixed rate mortgage of 5%, with say a $400,000 balance, that it takes you 151 months to pay off the first 25% of the mortgage? It takes 241 months to pay off the first 50% of your mortgage. It takes 309 months to pay off the first 75% of your mortgage. The remaining 25% is paid off in the last 51 months.
Let's explore a simple amortization table for a few 'interest'ing dynamics worth knowing:
TIP: I threw the spreadsheet together for this video to illustrate a point, it's pretty accurate but you'll find rounding differences in a more sophisticated calculator. I post 3-5 times a week with short 2-minute reads to help you grow personally and professionally.
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