Building Equity Through Homeownership

Homeownership is one way to invest. The City of Boulder's down payment assistance programs allow buyers to invest and build equity or wealth. However, the programs have clear parameters on how equity can be built which can limit equity.

The table below explains equity growth in three different scenarios to illustrate the limits of the city's down payment assistance programs. If you have additional questions, please reach out to the city's homeownership team at homeownership@bouldercolorado.gov or by phone at 303-441-3157.

Definitions

  • Equity: the value of a property after all loans on the property have been paid off. Some will refer to this as the personal wealth they have built as a homeowner.
  • Appreciation: increase in value.
  • Appreciation rate: the rate at which an investment grows in value.
  • Market rate home: a home value or price that is generated by the real estate market without any direct government subsidy.
  • Covenant: a legal contract creating rules and limitations for the buyer of the property.

Example Opportunity to Build Equity

Model Assumptions

  • 30-year fixed rate mortgage at a 6% interest rate
  • 7% annual average appreciation for market rate homes and Shared Appreciation Homes (H2O)

Will this program work for you?

  • Purchasing a home without assistance may work well for people who have enough income and assets to purchase a home without assistance.
  • Purchasing a home with the Shared Appreciation Loan (H2O) may work well for:
    • People who cannot get a high enough mortgage to purchase a home.
    • People who do not mind sharing a percentage of their home’s appreciated value with the city.

Frequently Asked Questions

In most scenarios, the best way to maximize your investment is to buy a market rate home without assistance. Historic trends indicate that purchasing a market rate home will result in the highest return on your investment. The city’s down payment assistance programs were created to help you if you don’t have the resources to purchase a market rate home.

Generally, more equity can be generated with the down payment programs. The down payment programs provide greater appreciation potential which results in more equity for the owner when they sell. The above table outlines the wealth building potential of the city’s down payment assistance programs compared to a market rate home.

A homebuyer builds equity through lower monthly payments by sharing in the market rate appreciation. Buyers purchase a market rate home with the help of an additional 0% interest down payment loan of up to $100,000 or 15% of the cost of the home, whichever is less, from the city. This loan does not require monthly payments, and the home appreciates at market rate.

With this loan, your monthly housing costs are lower because you don’t need to borrow as much money from a bank and your interest rate if 0%. When the loan comes due (at 15 years or when the home is sold), you are required to pay back the full amount borrowed from the city plus a share of the home’s appreciated value.

Learn more about the Shared Appreciation Loan (H20) Program.

With a 0% interest loan, there is no direct fee for borrowing the money. While the city down payment assistance programs do not charge interest, there is a cost.

The Shared Appreciation Loan (H20) program requires part of the home’s appreciation be shared with the city. Learn more about shared appreciation on the city’s website. No payments are made on the loan for 15 years, unless the home is sold, or title is transferred. At that point, the loan is due in its entirety plus a percentage of appreciation. For example:

  • Sample Purchase Price: $600,000
  • H2O Loan Amount: $90,000 (15% of purchase price)
  • Home Value When Loan Is Due: $800,000
  • Home Appreciation When Loan Is Due: $200,000
  • Amount Due (original loan + 15% Appreciation): $120,000 ($90,000 + $30,000)

Learn more about this program on the city’s website.

The Middle Income Down Payment Assistance program limits a home’s resale price which reduces equity building potential. The future resale price is restricted by a Permanently Affordable Covenant attached to the property. This covenant limits annual appreciation to between 3% and 5.5% each year. Learn more on the city’s website.

When you rent, all the money you spend on housing goes to your landlord. When you buy, you are building equity in your home. Equity is the difference between the market value of your home and the amount you owe the lender who holds the mortgage. If you sell your home, the equity you’ve built is the money you take away from the sale.

Rules around renting vary. Homes purchased through city programs prohibit homeowners from short term renting (e.g. Airbnb) and have specific rules for long-term renting. Homes that have a permanently affordable covenant have the most restrictive rental rules. Building equity through rental income is limited with these programs.