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One of the biggest perks of homeownership is that is builds your equity, strengthening your personal and family wealth. Equity takes into account the amount you’ve already paid off on your mortgage, as well as your home’s appreciation over time. Many homeowners mistakenly think of it as the difference between what they paid for their home and the outstanding amount on their mortgage, but in reality, you should calculate your equity by finding out the current value of your home, and then subtracting your outstanding amount from that figure.
Let’s look at this scenario to see how home ownership can grow your equity over 7 years.
This is a condo for sale in Griffintown, at $295,000.
Let’s assume you buy it with a 5% downpayment (14,750) at a mortgage of 25 years ($1,306 per month) with today’s lowest interest rate (2.54%):
- Amount borrowed: $280,250
- Principal paid in 7 years: $61,495
- Amount Outstanding: $218,756.4
- Appraised resale value considering the avg. increase of 3% per year: $362,812
- Home equity gained: 362.812-218,756 = $144058.19
- Net profit from a resale: $144,058.19
Now let’s compare this to renting a condo in Griffintown over 7 years:
- Average rental amount for a 1 bedroom with garage in Griffintown: $1,300 a month.
- Total amount spent over 7 years: $109,200
- Equity gained: $0
- Net profit: $-109,200
Equity is important because it contributes to your personal financial future and provides a forced savings plan that you or your family will be able to tap into in the future. In short, it’s an important way of making sure your money works for YOU and not for your landlord. Be smart and start building it today!