Fighting the Housing Slump Blues: Home Equity and Your Mortgage

By Richard Barrington Columnist

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The U.S. has been singing the housing slump blues lately. Perhaps you've heard the verse about home prices stalling, or else the verse about transaction volume being down. Maybe you've even heard the real tear-jerker, the verse about mortgage foreclosures being up. However, if you are a mortgage holder worried about your home equity, you may not have to join in and sing the housing slump blues yourself.


Home Equity Growth Accelerates Over the Life of a Mortgage

It is important to remember that most mortgages (i.e., except for interest-only loans) are structured so that even if home prices stay flat, some equity is accumulated each year. What's especially dramatic is the way equity accumulation accelerates in the later years of a mortgage.

At current mortgage rates, a homeowner with a 30-year fixed-rate mortgage would accumulate 1.16% of home equity in the first year. By the fifteenth year of the mortgage, this annual increase in equity would have grown to 2.80%. In the thirtieth year of the mortgage, 7.19% worth of home equity is accumulated.

Keep in mind, these are yearly totals. Naturally, the accumulated home equity is greater as the mortgage goes on, but the rate of accumulation is also accelerating.

Home Equity Acceleration is a Cushion Against Price Fluctuation

Note that the size of the mortgage doesn't affect these percentages; only the mortgage rate and the term of the loan do. At higher mortgage rates, the differential is more dramatic, with even more equity weighted toward the later years of the mortgage.

The point is that all fully-amortizing mortgages have some built-in cushion against home price fluctuations--and the older the mortgage, the greater the cushion. This means that for many homeowners, home equity remains a viable source of wealth, even if housing prices have stalled.

Yahoo! Real Estate

About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.

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