Equity is simply the difference between the “Market Value” of your home and your home’s current “Mortgage Balance”.
The 2 most common ways, to increase equity in a home are:
1. Pay down the debt over time, through loan amortization.
2. Wait for home values to appreciate and equity to be created through normal real estate cycles.
3. Both of these items can be combined to escalate your equity growth quickly.
This can either happen slowly over time or very fast. As we’ve seen over the last couple of years. For example, you bought a home 5 years ago, with an initial loan balance of $100,000. Since then, you’ve paid down $20,000 in debt. Giving you a current balance of $80,000. And since then, your current home value is now $120,000. Meaning that your current equity position today is $120,000 minus $80,000. Giving you $40,000 of equity. Note that the equity position is just imaginary or on paper only. Until you actually pull out that cash via a home sale or a cash-out refinance, the gains and losses of that property are not real. Note that the power of creating wealth through taking out debt on a property is a TAX-FREE event. Meaning you will not suffer from any additional taxes for taking out a HELOC or refinance on your home. However, if you decided to sell your home instead. You could be subject to capital gains on the profit. So definitely some effects to consider about what’s right for you.