How does owning a home create financial stability — it costs a lot to run a home!

Becoming a new homeowner puts you on the path to greater financial stability. Homeownership allows people with ordinary means to build home equity.

Home equity is the difference between the market value of your home and the balance on your mortgage loan. The more you pay down your loan balance, the more home equity you build (usually). Market prices of homes in your area affect how much home equity you can build.

Early on in homeownership, your equity will be low. Over time, usually, it grows as you pay down your mortgage loan. Here is an example of how to calculate your home equity:

Market Value: $175,000 (minus) Balance on Mortgage: $170,000 (equals) Home Equity: $5,000

Why is home equity important? Home equity allows you to create an asset of value. At some point, you may want to use this equity. How you use it is a very important aspect of your financial fitness. Here are some ways that people use home equity: • Fund retirement: At retirement, purchase a smaller home or sell the home altogether and use the equity to fund monthly living expenses. • Purchase a new home with a greater value, using your home equity as a “down payment.” • Borrow money through a home equity loan. Keep in mind: • Don’t ever let anyone pressure you into taking out a home equity loan—ever. There are shady people who want to steal your home equity and personal information. Read up on home equity scams on the Federal Trade Commission Web site: Home Equity Loans: Borrowers Beware! • Habitat homeowners must live in their homes for at least five years before they can consider any build up of equity as their own. • Use your home equity to improve your financial fitness, not as a source of cash.

You might have read elsewhere on this site to guard your Social Security number with your life. Your home equity is as valuable as your Social Security number—take great care to protect it. The longer you hang on to your home equity, the better it can serve you financially. Decisions to borrow money on your home equity should be made with great care. Why? You create more debt that has to be repaid. And that may affect your credit rating.