What’s my home worth? Whether you’re checking out recent home sales in your neighborhood or snooping a neighbor’s home value on Google, this is what we all tend to focus on. It’s the biggest number!
But, the most financially savvy folks track home equity instead — the value of your home minus the amount you owe on your mortgage. This is the real measure of home wealth:
- When you sell your home, you’ll need to pay off your mortgage first before pocketing any money.
- When you’re planning for retirement, your home equity is the savings you’re building.
- If you want to refinance your mortgage or take out a home equity loan or line of credit, your home equity helps determine what interest rates and money are available to you.
The first, and less talked about, factor in home equity is how much principal you’ve paid on your mortgage. Though your monthly mortgage payment stays the same, the amount that goes toward principal increases over time due to amortization. You can check this on your monthly mortgage statement or using House Numbers.
The second factor is your home’s value — how much your home would sell for today. This number will vary by source. But, if you use a high-quality, lender-grade automated valuation model (or “AVM”) like ours, it’ll give you a good idea. It’s what banks use. If you refinance, drop your PMI, or get a home equity loan or HELOC, you may also need a formal appraisal or broker price opinion (BPO).
What’s their impact?
In a typical year — with home prices increasing ~4.5% — the principal you pay on your mortgage will represent ~25% of your home equity increase and your home’s appreciation makes up the other ~75%. If you pay ahead on your mortgage, you’ll be building home equity faster than this. If home appreciation is lower, your mortgage payments contribute even more. Check out my spreadsheet to see an example.
Regardless, you need to track home equity to get the full picture and to optimize your home wealth management.