Equity in a home is the difference between what the home is worth and what is owed on the home. As the property goes up in value, the unpaid balance is going down with each payment being made. These dynamics are working in different directions to make the equity grow.
Leverage, the use of borrowed funds to control the investment, is another dynamic working in favor of homeowners. $9,975 invested in a certificate of deposit at 2% for three years would be worth $10,586. The same amount invested in the stock market at 7% would be worth $12,220. Using the same $9,975 to purchase a $285,000 home that appreciates at 2%* annually would have an equity at the end of three years of $41,350. All three examples have compound growth but only the home uses borrowed funds.
Buying a home requires money for a down payment and closing costs, good credit and the income to pay back the loan. Even if a person has all three of these requirements, sometimes, they are not sure if it makes sense to buy rather than rent. A Rent vs. Own comparison can show you the financial advantages without considering the tax benefits.
Most homeowners will say that their home is the best investment they have made. Not only in the satisfaction of owning their own home, where they can raise their family and a place to share with friends but also as a strong financial decision.
*Core Logic reports national home prices are up in October 2019 by 3.5% year over year and predicting 5.4% for 2020.
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