What is Equity and What Can You Do With It?

What is Equity and What Can You Do With It?

I was speaking to a young couple the other day and they were asking me if buying a condominium was a smart financial move. So, I decided to give them my own scenario. Buying a condominium is exactly what we did as our first home. After just a couple of years, the equity had built up enough that we were able to sell and put a substantial down payment on a single-family house.

She gave me this puzzled look and asked, “equity? What is equity?” It hadn’t occurred to me that she didn’t understand the terminology so I backed up on my story and explained how equity works.

You might be in a similar situation. Perhaps you’re trying to buy your first home and struggling to pull together a down payment. There are great options for low down payment loans these days, some as low as 3% and, depending on your credit history, you may be able to qualify for additional loans, lowering your down payment to just 1.5%. It’s important to talk to a loan officer about all of your options. Read More: Can you buy a home with no down payment?

We chose a condominium as our first home so that we could ease ourselves into the responsibilities of homeownership. Renting is easy. If something breaks, you simply call your landlord to have them repair it or replace it (a good landlord anyway). But, once you are a homeowner, it is your responsibility to repair or replace items should they break. We decided that owning a condominium would be a good first step as we were responsible for everything inside the condo and the Association we were a part of was responsible for everything outside the condo. We wouldn’t have to worry about painting the condo, replacing a roof, or fixing siding or stairs. The only thing we needed to worry about was appliances inside the condo and any interior repairs.

How to Build Equity

When we first purchased in 1999 we were able to find a condominium for $98,000. Almost unheard of in this day and age. We were able to obtain an FHA loan with a low down payment option. After scraping together enough for that loan, we maintained a comfortable mortgage payment for two years. During that time, the market in our area exploded and we decided to buy a larger home and start a family.

After some research, we discovered that similar condos in our area were now selling at $125,000. This was a great increase in value. And, that’s equity. We now had $27,000 in equity, and probably more since we had been paying down our original loan for two years.

The difference between what you owe on a home and what the home’s value is currently is called your equity. It’s literally money you have made by living in your investment as the market increased.

At this point, we had a good chunk of change sitting in a condominium that could be utilized when we sold the property. And that’s exactly what we did. We were able to sell the property for $125,000 and put that equity towards a larger down payment on a single-family house. We were able to make a 10% down payment on a $200,000 house, get a better interest rate, and a reasonable mortgage payment. Our lender just rolled our equity into the down payment on a new house. Now that we had a little more experience at being homeowners, we were able to take on the full responsibility of a single-family house.

So that’s how you can use your equity to move up. Everyone should start somewhere in a condominium is a great option if you’re looking at easing yourself into homeownership and its responsibilities.

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