Homeownership has long been a part of the American Dream, home equity families with a place they can call their own while building wealth over time. One of the ways that wealth is built is through home equity, which is the difference between your property’s market value and your mortgage balance. You can build your home equity over time by making a large down payment, maintaining steady mortgage paying habits and riding the wave of property appreciation (though it’s not always guaranteed).
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When you purchase a home using a mortgage loan, you have a shared ownership stake in the house with your lender. Your down payment represents your initial share of ownership, and as you pay down the principal on your mortgage, your share of ownership grows while your lender’s share shrinks. The value of your home’s market appreciation can also help you build equity, but that typically takes a lot of time and effort, and it can be risky in the event that property values dip.
If you have built up enough home equity, you can leverage it to fund projects like a kitchen remodel, consolidate debt or cover other expenses. However, it’s important to understand how your home equity works before taking the leap and borrowing against your house.