Appreciation and amortization are key factors in building equity for homeowners with mortgages. As the home increases in value due to appreciation and the unpaid balance goes down due to amortization, the equity increases.
Appreciation is the increase in value of a home and is usually measured year over year. In recent years, appreciation has been robust (19% nationwide in 2021) due to high demand and low inventory. The news will often quote annual appreciation rates from a national or regional level.
Occasionally, you may see a chart that tracks the annual appreciation over a period, but it is more interesting than practical. It can be used to determine an average rate over a more extended period that you can use to project future growth.
The reality is that supply and demand determine appreciation and location, and condition. To reflect what your home has appreciated more accurately, you'll need to find local numbers that your real estate professional can provide.
The amortization of a loan is consistent with regular monthly payments based on the mortgage term. Homeowners frequently receive a monthly statement from their lender declaring the current unpaid balance, either through the mail or online.
If a homeowner makes additional principal contributions toward the loan, the unpaid balance will accelerate the standard amortization schedule. Additional principal payments on fixed-rate mortgages shorten the term of the mortgage. Additional principal payments on adjustable-rate mortgages will lower the payment on the next anniversary date.
Equity in a home is the difference between the value of the property and what is owed on in. If there is no mortgage on a property, the equity and value of the home are the same.
To illustrate how equity is influenced by appreciation and amortization, let's look at an example of a $400,000 purchased today that appreciates at 3% a year using a 90% mortgage at 4% for 30 years.
The $40,000 would grow to $182,135 in equity in seven years, with $91,950 coming from appreciation and $50,186 from amortization.
If the appreciation in the same hypothetical example is increased to 5% annually, the equity would be $253,026, with $162,840 coming from appreciation and the same $50,186 from amortization. The same loan amount, rate, and term will result in the same unpaid balance as the example with lower appreciation.
With the considerable appreciation experienced in recent years, the values are going up fast and benefit the people who currently own a home while making it more expensive for would-be buyers. Another factor facing buyers is rising interest rates.
It is essential to get the facts about the market and your individual situation to determine what alternatives you have to purchase a home in the near future. Your agent can provide this objectivity and recommend a trusted mortgage professional to be pre-approved.