Building home equity is one of the advantages of owning a home. But what does it mean to have equity in your house?
Home equity is the value of a homeowner’s interest in their home, calculated by subtracting the amount of any outstanding mortgages or liens on the property from the current market value of the home. In simpler terms, it represents the portion of the home’s value that the homeowner owns outright.
For example, if your house is worth $300,000 and you have a mortgage balance of $100,000, your home equity is $200,000 ($300,000 – $100,000).
Another example, below, is if you’ve just bought a house and paid a certain amount for a downpayment.
Home Price $ 150,000
5% Downpayment $ 7,500
Mortgage $ 142,500
Home Equity $ 7,500
For this example, the amount that you paid (downpayment) is your equity. Any downpayment you make when purchasing a house is your initial equity. So, if you paid cash for the entire price of the house, you own 100% of the equity.
Your home equity grows over time, as you continue to pay for your mortgage principal. However, the changes in the real estate market directly affect your equity. If the prices of houses in your area increases, your home equity also increases. On the other hand, if it decreases, your home equity will also go down, but be patient and wait for the market to recover.
Aside from the market, the condition of your house is also one factor where you could either gain or lose equity. A deteriorating house loses its value, so updating your house features is recommended to add value to your house and increase your equity.
Increasing your home equity goes towards your financial advantage. You may not need it now, but you may need it in the future. So here are 5 ways you can increase your home equity.
5 Ways to Build Home Equity
- Downpayment Counts
As discussed earlier, your downpayment is your initial equity when you purchase a home. The more cash you pay for the property, the more equity you begin with. Making a large downpayment will give you a higher equity to start with.
- Make Extra Payments on your Principal
If your budget allows, or when you are able to do it, adding an extra payment towards the principal on your monthly mortgage takes away a substantial amount from your outstanding debt. This will decrease the amount of interest paid over the life of the loan.
- Home Improvements
Updating your bathroom and kitchen adds up on the value of the house. Not all changes increase equity, so you have to be smart when updating your home or doing renovations. It is great to furnish a house based on your preference or style, but you have to consider more reliable investments like a new roof, or a new HVAC system. If you have any questions on how to improve your home to increase equity, Hummel Group has the answers.
- Borrow Against Home Equity Only When Needed
Home equity is not liquid wealth, so cash cannot be withdrawn quickly from home equity. But there are numerous ways you can use the equity in your house as collateral to obtain low-cost funds for your financial needs. Only use this option if it is necessary, like for an unforeseen emergency.
Think about the main purpose of why you need a loan, to ensure that you don’t waste this benefit, and use it instead to boost your financial situation. This makes certain that you will have the equity available when you need it the most.
- Sell Your Home When the Market is Promising
Selling your home at the right time is key to getting a higher equity. Consider the market situation, the season, and the real estate trend in your area. Having the right person to guide you means a lot for this option.
Whether you plan to use the profit you will get from your home equity for retirement, pay for your kid’s education, or buy a new home, it is important to know when is the right time to sell it and have someone who knows how to sell it. If you are in Metro Atlanta, Hummel Group can do this for you.
House equity is a significant asset and one of the main advantages of owning a home. It’s a key strategy that will help you and your family accumulate wealth and financial stability, so use it to your advantage.