Ahhhh, Equity. Equity is a lovely beautiful wonderfully good thing. You’re gonna love Equity!
Equity is made up of a couple of things:
1. The money you’ve made in the business. That is, the money that’s left from the sales you’ve made after you’ve paid the bills. (Otherwise known as Net Income.)
2. The money you put into the business to get it started. For example, the money you had to use to open your business checking account. (Unless it was money from a sale you made. But, never fear, we’ll get to that.)
3. The value of the stuff you own after you’ve paid off any loan you had to take out to buy it. For example, each month you make a mortgage payment the payment goes a little toward the interest on the mortgage and a little toward the principal of the mortgage. However much principal you’ve paid off compared to the value of what the thing is worth is how much equity you have, and, therefore, how much you own!
Okay, everybody still with me? Confused? Well, look at it like this:
You bought a house for $100,000.00.
You put $10,000.00 down.
(Bear with me, I swear there are no trains traveling in the opposite direction or anything like that. ☺)
Okay, if you bought it for $100,000.00 and you put $10,000.00 down, that means you’re going to need a loan (mortgage) for $90,000.00 in order to buy the house. So far so good?
So, you go to the bank and get a mortgage and the bank tells you how much you have to pay each month. Now, some of that payment goes toward the interest you owe on the $90,000.00. Interest is money you have to pay the bank for using THEIR money to buy the house. The rest of it goes toward reducing the balance of the original $90,000.00 you borrowed, or the “principal”.
Okay, ten years pass and you’ve made LOTS of payments to the bank. Which means you’ve made LOTS of payments toward the $90,000.00 you originally borrowed. Let’s say you’ve paid $20,000.00 towards that $90,000.00 principal. (I’m just using numbers here, if it’s bugging anyone let me know, and I’ll run an interest schedule and use actuals. But, for now, I’m trying to keep it simple.)
The $20,0000 in payments you’ve made toward the original $90,000 you borrowed PLUS the $10,000 you put down on the house originally, means you have $30,000 in EQUITY in your home
Basically, it’s the amount of an asset you own free and clear.
OR:
Down payment + Principal Payments = Equity in the House.
AND, if the value of the house has gone UP since you bought it, or you’ve made improvements to the house which increased what you could sell it for, then it would look like this:
Down payment + Principal Payments + Increase in Value of House = Even MORE Equity!!
See? Don’t you just LOVE Equity now?
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