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Buying a Luxury Home: Understanding Home Equity

Buying a home is about finding a place for you to call your own. Whether you live alone or with a family, it is imperative for you to find a place that suits your needs. However, you also need to think about the future and the return on your investment. Understanding home equity is an important part of that.

Mortgage vs. Value

Home equity is the difference between the amount you owe on your home and any other property it secures and the actual market value of your home. When you first buy a home, there will be little – if any – equity. The seller’s real estate agent likely determined the market value of the home when you purchased it, and used that figure to come up with the price you paid. Over time, though, as you pay down the balance of your mortgage, the equity grows. In some cases, equity can diminish. These are things you should consider when you buy your Denver luxury home.

When Does Equity Grow?

Concisely, the bigger the gap between the amount you owe on your home and your home’s fair market value, the more equity you have. You can do many things to increase your home’s market value, which has a direct effect on your equity. Home improvements are the number one way to improve equity, but there are other factors to consider. For example, if your neighborhood’s school system improves over time, or if crime rates drop, your property may become more valuable with time.

When Does Equity Diminish?

In some cases, home equity may actually diminish with time. This typically occurs when the value of a home begins to fall, whether due to disrepair or even the state of the neighborhood in general. For instance, if a well-maintained luxury home has an expected value of $1.5 million but other homes in the neighborhood sit vacant and in disrepair, this diminishes the overall value of your home. Things such as crime rates, school systems, and even neighborhood amenities like shopping and restaurants can have an impact on the equity in your home, as well.

Why is Equity Important?

As you build equity in your home, you also build a line of credit that you can draw on when needed. For instance, if the fair market value of your home is $1 million and you owe $250,000 on the balance of your mortgage, you have roughly $750,000 in equity to work with. You can draw on this a little at a time or all at once, and because your home essentially secures those funds and acts as collateral, you get lower interest rates. You can use the equity in your home to pay for college, to fund a vacation, or even to buy another piece of property.

Many people tend to get confused about home equity and the things that effect it, but your real estate agent can provide valuable information about equity potential in many Denver luxury homes. Many things affect your home’s equity, and learning more about them can help you make better buying decisions.

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