Appreciation

The term Appreciation as applied to homes and mortgages refers to an increase inthe value of a property.

You may realize appreciation on a property due to a positive improvement in the property, the area, or the removal of another negative factor.

The rate of appreciation differs depending on the area some areas appreciate faster than others but given time your home will go up in value.

Commonly, and incorrectly, used to decribe an increase in value due to inflation.

Appreciation is the increase in value of your home. This is one of the many benefits of home ownership. Many homes have seen double digit appreciation in the last several years.

One major misconception that many homeowners/consumers have is that appreciation represents some type of monetary performance of the equity in their home. Appreciation takes place whether a homeowner has 0 equity or $200,000 in equity. The appreciation is obtained from increased market value of the property. The equity, when trapped in the home is "lazy" - meaning it is not a performing asset.

Many of the savviest real estate investors know that the key to building their fortunes by using the equity in their homes as the foundation is to separate the equity from the home at a good valuation, and use this substantial liquidity, which is often borrowed at a fraction of the market rate of return in alternative asset classes, to invest in equities, commercial real estate, and most profitably in their own small businesses, yielding a substantially higher return than the nominal interest rate on the money they've cashed out of the home. This is a trick copied from big business and can be the cornerstone of a powerful wealthbuilding strategy for homeowners who aspire to financial freedom.

If you feel that your home has appreciated a good amount, you should consider refinancing your current mortgage to get money out, or to get more favorable mortgage terms.

Let's look at some numbers to put this in perspective and show you why appreciation makes real estate such a good investment. Take a 200K home bought for full value with an appreciation rate of just 5% per year.

Year 1 - 200,000
Year 2 - 210,000
Year 3 - 220,500
Year 4 - 231,525
Year 5 - 243,101

Now is it starting to sink in why appreciation is a key factor in Real Estate?

When your property appreciates, the lower the amount you have in equity, the greater your return on investment.
For exmaple, let's say you buy 2 proerties for $100,000 each. One you pay $100,000 cash for. The other you put 20% down. After 1 year, assume both have appreciated by 10%.
On the first property, your $100,000 investment is now worth $110,000, or a 10% return-on-investment.
On the second, your $20,000 investment has grown to $30,000 equity, or a 50% return-on-investment.
One real estate investment strategy is to buy a property with 20% down and hold it until the property has appreciated by a little over 20%. Then the property is sold and 2 properties are bought with 20% down on each.

Not all homes appreciate at the same rate over time. There are many factors that determine the rate of appreciation. These factors are but not limited to: location, property type, construction material of the property and the buyers willingness to pay the asking price.

» DISCLAIMER: The information contained in this article on 'Appreciation' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.