What Is Home Equity?
Simply put, home equity is the amount of your house that you actually own. It is the difference between the value of your property and the mortgage balance against it.
For example, if you sell your home for $125,000 and you pay off what you owe on your mortgage (let’s say $100,000), your home equity is $25,000.
Conversely, you could have negative equity in your home, meaning you owe more than what your home is worth in the current real estate market. Ideally, you will want to build as much equity in your home as you possibly can so that when it comes time to sell, you can walk away with as much as possible.
The equity you build in your home can work for you long before you ever sell your home. You can use a Home Equity Loan, which uses the equity in your home, to pay for improvement projects which in turn build more value into your home.
There are several ways to build up equity in your home. These options all involve either working towards increasing the value of your home or reducing the balance of your mortgage loan. Read on for more information on improving a home’s equity.
Reducing Your Mortgage Loan Balance
Shorten Your Loan Term By Choosing a 15-Year Mortgage Loan
One way to build equity in your home is to finance with a 15-year fixed mortgage loan. Although this mortgage option increases the amount you pay monthly, you are able to gain equity faster than you would if you took out a 30-year mortgage. Check with a mortgage lender to calculate the difference in payments for a 30-year and a 15-year mortgage. You might find that you can make it work. You will pay off your house in half the time, plus, a shorter loan term generally comes with lower interest rates.
Put Down a Bigger Down Payment
Another way to build equity in your home is to make a larger down payment. This would reduce the size of your loan, decrease your monthly payment, and help significantly during a financial setback. Use a mortgage calculator to find out if you can manage a larger down payment. By making a larger down payment, you protect yourself from negative equity in the case that home values decrease.
Pay More Toward Your Principal Balance
Putting more toward your principal balance will reduce the amount you pay in interest over the course of your mortgage. This can be beneficial for building equity in your home in the event that your home is appreciating at a slower rate than expected. One extra principal payment per year could pay off your mortgage seven to eight years ahead of time. Does this seem unattainable? It doesn’t have to be. If you receive a bonus at work or a considerable tax return, you can put this toward your principal balance. Alternatively, divide your monthly mortgage payment by twelve and add that amount to each mortgage payment to pay your principal faster.
Increase the Value of Your Home
Home Improvement Projects
A lot of people don’t realize how much value home improvement projects can add to their property. Oftentimes, updating the kitchen with refinished cabinets, up-to-date countertops, and upgraded appliances provides a high return on investment, building equity in your home. Aside from the kitchen, a bathroom makeover or upgrades to the windows and doors can increase the value of your home significantly, without setting you back financially.
Maintenance
Major appliances need to be maintained periodically in order to function properly. Doing so will pay off when it comes time to sell your home. But, maintenance doesn’t just include major appliances like your air conditioner and furnace, but also must-haves such as roofing, insulation, and plumbing. Regular maintenance not only helps to increase your home’s value, but also increases the equity in your home.
Curb Appeal
As the name suggests, curb appeal refers to the view of your home from the curb, or from outside your home. Maintaining exquisite curb appeal is a great way to impress potential buyers without unloading your entire savings account. This can include planting flowers and other attractive landscaping options, putting on a fresh coat of paint, repairing rotting wood, replacing lighting, and updating various fixtures. These updates are likely to offer a good return on your investment, building your home’s equity.
How will you work to build equity in your home in the coming years? Use this budget worksheet to help determine your goals.
Still have questions? Speak with a Diamond Credit Union professional today.
