What’s the Difference Between Equity and Purchase Price?
When you buy a home, what you pay for it is your purchase price. But the home actually may be worth more or less than what you paid, which can affect your equity. Though equity and purchase price are linked, they mean different things.
The purchase price of your home is whatever you agree to pay for it. So if you pay $200,000 for the home, that’s the purchase price. The price will be affected by a number of factors, including the market value of the home as determined by an appraisal and what your mortgage company is willing to lend you. The purchase price often will be something less than what the person selling the home was asking for, although it can be higher in some cases when there is a lot of competition among buyers for the house.
Home equity is the difference between what you spent on the home and what it is actually worth. If the purchase price of the home is $200,000 and you put down 20 percent, then you borrowed $160,000. That means you have $40,000 worth of equity in the home. If after five years, your home’s value has grown to $240,000 and you have paid down your loan to $140,000, you would then have $100,000 worth of equity in your home.
The main difference between the purchase price of your home and equity is that the price you pay is a onetime value of your home. Over time, your value is likely to rise, but it may fall, which can affect your equity. What also affects your equity is how fast you pay down your loan balance. The more you pay toward the principal amount of your mortgage, the more it increases your home equity because you owe less on your loan.
Importance of Equity
How much equity you have in your home can be important for a number of reasons. If you have enough equity, you can borrow against it using either a home equity loan, a home equity line of credit or a cash-out refinance. Some agents, like those at Century 21 Town & Country, know all the different financing options that are part of buying a home. How much equity you have also will determine how much you receive when you sell your home, minus any commission you pay to a realty agency you work with.
Your purchase price is what you pay for your home. Your equity is how much of the home you actually own free and clean of any liens. That’s an important distinction for homeowners to know and understand.