Two ways low interest rates build home equity.

Jan 11, 2021

Two ways low interest rates build home equity

By Vanessa Saunders, MBA, MIMC , Broker Owner, Global Property Systems Real Estate.

If you’re a first time home buyer, you can take advantage of the low home mortgage rates we are experiencing now to grow the equity you have in your home much faster than when interest rates were much higher.

What is equity?
In the simplest terms, your home’s equity is the difference between how much your home is worth and how much you owe on your mortgage. To calculate your home equity, all you need to do is subtract the amount of the outstanding mortgage loan from the price paid for the property. What’s left is the equity you have in your house.

Let’s say you bought a $250,000 house with a down payment of 7% (approximately $17,500), resulting in a loan amount of $232,500. By securing a 30-year fixed-rate mortgage at 3.5%, your monthly mortgage payment is $1,044 without taxes and insurance.

How can interest rates add equity?
Low interest rates like we have today allow you to do two smart things. One, with smaller monthly payments, you can likely afford to pay a larger amount down to secure a mortgage loan. That larger “nut” you put down is the equity you have at the time of purchase. Second, because your interest rate will mean lower payments, you can afford to make extra payments. In the terms of most mortgages, extra payments are applied to pay down the debt you owe. They represent 100% equity.

Low rates and the value of your home.
Equity is also gained (or lost) by how much your home is worth at any given time. So if your home appreciates a couple of thousand dollars each year, it grows equity, which translates into cash when you sell. Today’s low interest rates are driving prices up in the Hudson Valley’s seller’s market..

Building equity through your monthly principal payments and appreciation is a critical part of homeownership that can help you create financial stability. It’s important to note that some areas of the Hudson Valley real estate market appreciate faster than others. It’s also possible for home values to depreciate due to economic conditions, your home not being kept up or a drop in neighborhood home values.



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