Take Heart: Soft Housing Market Does Not Mean an End to Home Equity

By Richard Barrington
LoanPage.com Columnist

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In recent years, the housing boom has rapidly fueled the wealth of American homeowners by adding to home equity at a brisk rate. With all the publicity about the current downturn in housing, you might think this source of financing may have dried up. Rest assured: while the pace of the flow may have slowed down, home equity lenders remain open for business.

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The key is this--there are two ways of building equity in a home, and price appreciation is just one of them. Borrowers who make fully-amortizing mortgage payments also build home equity in what we might call the old fashioned way: by paying off loan principal.

Pace of Home Equity Build-Up Accelerates Over the Life of a Mortgage

This is especially true of people who are well into their mortgages, because the rate of principal payoff accelerates over the life of a mortgage.

For example, using a 30-year mortgage with a representative interest rate (6.50%), we see that in the first ten years of a mortgage, the homeowner would repay 15.22% of the principal owed the lender. In the second ten years, an additional 29.11% is repaid. In the last ten years of the mortgage, another 55.67% is repaid, representing the remaining balance owed to the lender.

Price Declines Seem Minor in Comparison

Those figures--15.22%, 29.11%, and 55.67%--represent the accumulation of home equity. In most regions of the country, home price declines have not come close to wiping out numbers of these magnitudes. In short, for many Americans with longstanding mortgages, home equity remains largely intact and is a viable source of financing.

Sources
Associated Press
Yahoo! Finance

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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