When a low down payment controls an asset worth many times the money you put down, the financial people call it leverage. For example, if you put $6,000 down on a $200,000 house, your $6,000 controls a $200,000 asset. If the home’s value goes up to $225,000 over the next three years, your $6,000 becomes worth $25,000—a 317 percent return on your investment, thanks to leverage.
When a home’s value increases, it’s called appreciation. In the example above, the appreciation would be $25,000. On the flip side, if the home had gone down in value, there would be depreciation. Another term used a lot in the real estate industry is equity. This is the difference between a home’s current value and the loan balance. It can go up or down, depending on the local real estate market. If a mortgage balance is $200,000 and the current market value is $250,000, the difference of $50,000 is equity.
If you were to talk to a mortgage lender about a second or home equity loan, the lender might tell you she is willing to go up to 90 percent of your equity. Your loan check would then be for $45,000 (90 percent of $50,000) in the above example. In some areas of the country, homes have appreciated dramatically the last few years. If you were to sell and move from a high appreciation area like San Francisco to a lower appreciation area like North Dakota, your equity and the same monthly payment could allow you to buy a significantly larger home.
Although the national economy strongly influences local real estate, the equity you accrue is still dependent on local supply and demand. When you cash out your equity and move to another area, you’ll most likely get either a housing upgrade or suffer sticker shock. This economic reality also applies to renting. Moving from an apartment in Fargo, North Dakota, to New York City would also give you sticker shock, but as a renter you wouldn’t have any equity from your last house to cushion you.
When a home’s value increases, it’s called appreciation. In the example above, the appreciation would be $25,000. On the flip side, if the home had gone down in value, there would be depreciation. Another term used a lot in the real estate industry is equity. This is the difference between a home’s current value and the loan balance. It can go up or down, depending on the local real estate market. If a mortgage balance is $200,000 and the current market value is $250,000, the difference of $50,000 is equity.
If you were to talk to a mortgage lender about a second or home equity loan, the lender might tell you she is willing to go up to 90 percent of your equity. Your loan check would then be for $45,000 (90 percent of $50,000) in the above example. In some areas of the country, homes have appreciated dramatically the last few years. If you were to sell and move from a high appreciation area like San Francisco to a lower appreciation area like North Dakota, your equity and the same monthly payment could allow you to buy a significantly larger home.
Although the national economy strongly influences local real estate, the equity you accrue is still dependent on local supply and demand. When you cash out your equity and move to another area, you’ll most likely get either a housing upgrade or suffer sticker shock. This economic reality also applies to renting. Moving from an apartment in Fargo, North Dakota, to New York City would also give you sticker shock, but as a renter you wouldn’t have any equity from your last house to cushion you.
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