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Our homes are often our greatest asset, as well as being the place we live, laugh, love, and for many of us, where we work and manage our side hustles. When you make the most of your asset by building equity into your home, you increase your wealth. Building home equity is one of the easiest and most satisfying ways there is to increase personal wealth. In this article we will discuss many ways you can increase your home's equity.
What is Home Equity?
Basically, it is the difference between what your home is worth and how much mortgage and other loans you have which are secured by your home. If your home's market value is $300,000 and your total secured loans add up to $240,000, then your equity is $60,000. Whatever your equity amount is, you can increase it in several ways.
The 3 Routes to Building Equity.
There are three obvious routes:
- Keep Your Home
- Add Value to Your Home
- Reduce Your Debt
Keep Your Home
This is the easiest way. Markets do fluctuate, and a home's value may go up and down, but according to the Federal Finance Housing Agency, home values tend to increase over time. If you click on this link and enter the date you bought your home, you can see how its equity has changed while you have owned it. Typically, the longer you own your home, the more equity you will have in it, as long as you pay your mortgage on time and do not add to the debt.
Add Value to Your Home
Maintain It
Wear and tear usually mean that rooms, fixtures, fittings, and appliances will need to be touched-up, repaired, or replaced over time. By keeping everything looking good and working properly you usually build equity. Many homeowners decide to sell for different reasons, such as a job transfer or a change in family circumstances. Sometimes the decision to sell is made quickly. By keeping everything looking good and working properly, the market value should be higher.
Improve It
There are many ways to improve a home:
- Replace fixtures in a bathroom or kitchen.
- Add a room or convert an existing room to a home office, theater, or game room.
- Renovate or replace floors, light fittings, or windows in living areas.
- Finish the basement.
- Add a deck, patio, or porch.
- Remodel the landscaping.
- Improve curb appeal with new paint, a new front door or garage door.
All these suggestions will help build equity. This article by HGTV lists 15 ideas and gives an indication as to the immediate return on investment. Even though the cost of making the improvement may not immediately reflect in a 100% rise in market value, the return on the investment will add to the home's value year after year, so will continue to build equity.
Reduce Your Debt
The less you owe on your mortgage or other secured line of credit, the greater your equity. There are many ways to minimize debt. Some require more financial commitment than others, some take forward planning, and some are simple, easy, and occasional. What matters is they all help you to build equity. Let's look at one at a time.
Bigger Down Payment
This takes advanced planning, of course, but the bigger your down payment, the smaller your mortgage, so you start ownership with more equity. If you can make a 20% or higher down payment, you do not have to pay private mortgage insurance (PMI) so you could use that free cash to pay down your mortgage principal each month.
Change Your Payment Frequency or Amount
Many people are paid biweekly but pay their mortgage monthly. By paying half your monthly mortgage amount every two weeks you actually make 13 payments in a year and not 12. That extra payment reduces your principal, reduces the interest owed on the principal, and builds equity.
Pay More Each Time
Every little bit helps. Choose an amount you are comfortable not spending on something else and add it to your mortgage payment. When you choose First Savings Mortgage as your lender, just tell us to allocate that amount to your principal, and we will do the rest. Another more powerful way to reduce your principal balance is to budget for a larger amount. If you have two or more salaries coming in, allocate a fixed amount from one of them to go to principal reduction. If you have a side hustle, allocate a percentage of every payment you receive to go toward principal pay-off.
If you cannot make a regular payment, you could take birthday gifts and other gifts as cash or use bonuses or overtime pay from work, tax refunds, and use them to reduce the principal and build your equity.
Refinance to a Shorter Term
Another option is to change from, say, a 30-year loan to a 15-year loan. Your monthly payments will increase, but the interest you pay will reduce. If you can handle the increased outgoing payments, you'll build equity faster.
The Takeaway
The more equity you build, the more wealth you have. The more you can allocate, either every two weeks, monthly, or annually, the greater the reward. Over the years, each small payment will grow as the market value of your home increases. You may be considering selling your home or you may just want to discuss any of these options with one of our loan officer experts. Asking lots of questions is a great way to know you have all the information you need to make the right decisions for you and your family.
Please note, by refinancing your existing loan, your total finance charges may be higher over the life of the loan.