Brick by Brick: Building Equity with Your Home
Home ownership comes with many benefits; one of which is the building of equity. It does take effort but can become a valuable asset over time.
You may be asking yourself- what exactly is equity? Equity is the difference between your property value and the amounts owed on your mortgage.
Home value: $250,000
– Amount owed: $100,000
= Equity: $150,000
As you can see in the example above, the amount of equity is a positive number. This is a good thing! The higher the number, the better.
You can build equity by either increasing the value of the property or by decreasing the amount of debt owed. This can depend on your efforts as a home owner.
Increase the value of your property.
The value of your home plays a key role in the calculation of your equity. An increase in value means more equity for you to utilize.
You can take an active role as a home owner: make improvements on your home to increase the property value by renovating outdated rooms, add energy-efficient elements, or design a more appealing landscape. Depending on the level of detail you put in, home improvement can be a financial investment itself, so make sure your plans align with your budget.
Also, making sure your home is properly maintained plays a big part as well. Regular upkeep is one of the responsibilities as a home owner that you do not want to ignore. Fixing leaky faucets or loose floor boards may not sound exciting, but a house that has a roof about to collapse does not bode well for your equity.
You could just get lucky: sometimes home values in a particular market rise over time without you having to lift a finger. This can be due to several factors including the economy, community, and expanding cities.
Decrease the debt you owe.
Most mortgage loans are set up so you pay down the debt on a fixed, monthly basis. This is called amortization. The length of your loan affects the amount of principal vs. interest you pay. The most popular mortgage loan length is 30 years.
So, what do you do if you want to build equity more quickly?
You could get a shorter term: however, your monthly payments will be higher. But- you will spend less on interest.
Make extra payments: no matter the length of your loan, you can pay more than your monthly amount. It’s up to you and your financial flexibility. This doesn’t have to be every month either. You can make a payment whenever you want. Applying that extra money to your principal will reduce the debt owed and increase your equity.
Be wary of second mortgages or refinancing: debt reduction is the goal. If you start over, building of equity is slowed and borrowing against your home increases your debt. Do your research and speak with a professional about these options. If there is a viable way in which to stay on target with decreasing your debt and increasing your equity, then great!
Let’s talk about the term “Forced Savings”. This is another term some people use for mortgage payment. You might think that making a payment is counter-productive when it comes to savings, however, you are actually increasing the value of an asset (your home equity).
Now that you know what equity is, what can you do with it? Think of it as an asset you can use to get other assets. Selling your home, now means getting cash for your equity. You could use it towards a purchase of another home instead of borrowing more money. See- it’s a win/win!