How home equity is like cream
My relatives are dairy farmers from the Midwest, Menomonie and Blanchardville Wisconsin, to be exact. While I grew up in Maryland near D.C., I spent quite a few summers on my relatives’ farms, running down the aisles in the barn amidst the milking cows.
Cow milk lends itself well to a study of homeowner equity. How?
The price of milk goes up and down like a rollercoaster (NASDAQ image)
A farmer can’t control the price of milk on the open market. But, she can control the volume of milk her cows produce and also the amount of buttercream.
The biggest factors that increase milk volume, and increase fat content, or cream, are the genetic makeup of a herd and nutrition.
What on earth does this have to do with home equity?
The price of homes also goes up and down like a rollercoaster. There is little that an individual homeowner can do to change the macroeconomics that determine the bulk of your gains or losses.
But, there are factors a homeowner can control. Similar to how farmers can control the genetics and nutrition of their herds, homeowners who buy quality homes with inherent structural soundness in quality areas tend to do better.
But the cream.
Ultimately, what matters most to homeowners is not home price! When you sell, the only money that you get back in your pocket is your home equity, the part that is yours.
And we do have control over how much home equity we build. This comes mainly from the way that we finance our homes and pay back our loans.
Home equity = home value – what we owe on our homes.
Watch this video to see learn more about home equity.
Why is home equity ultimately the only part that matters? A homeowner with 100% home equity and no other assets has more net worth than a homeowner with a home four times as expensive but with 20% equity. Pretty simple, really.
If you decide to pay your loan back faster, or have a lower interest rate, or make extra payments, you are controlling the amount of home equity you have in your home.
And yes, if home prices do happen to go up, that’s a sure way to have even more equity in your home, if what you owe stays the same.
Would you like some more cream in your coffee?
Do you want to learn more about how to make your home a financial success, no matter how much home equity is in your home? Read about our new book: Avoid the Money Pit, Turn Your Home Into A Financial Powerhouse. It’s available now in both digital and print copies and takes you through everything you need to know about making your home a financial success in the short and long term, without getting taken advantage of.