One of the biggest advantages of owning your own home (instead of renting) is the ability to build equity with it. From the initial down payment to your monthly mortgage checks, every dollar you put toward paying off your home is growing your home equity.
Why is home equity important? Of course, the more equity you have in your home, the higher your net worth. But also, you may need to tap into that equity someday to cover a major cost - college tuition, credit card debt, medical bills, etc. Here’s what you need to know about home equity and two ways you can help to build more equity in your home.
What Is Home Equity?
Put simply, home equity is the difference between what your home is worth (it’s market value) and what you’ve already paid into it.
Market Value - What You Owe = Home Equity
For example, if your home has a market value of $500,000 and you owe $350,000 on it still, that means you have $150,000 in home equity.
Boosting Your Home’s Equity
Every time you make a payment on your house, your home equity increases. And every time your home’s value rises, so does your equity. With that being said, there are primarily two ways in which you can increase your home equity: increase your home’s value or pay down your mortgage.
Increasing Your Home’s Value
If you’re looking to boost your home equity and improve your day-to-day living, renovating or adding on to your home could be the answer. Making smart home improvements or increasing the square footage are effective ways to increase the value of your home. Major renovations such as kitchen remodels, bathroom updates and the addition of office or bedroom space can add significant value to your home.
Of course, the renovations themselves can quickly add up, especially if you outsource the labor to a contractor. But if you are able to DIY some of the improvements, you could see a significant value.
Making Additional Mortgage Payments
Adding payments towards the principal of your home loan may get the balance down quicker, save you on interest - and, in turn, increase your home equity. If you experience a sudden or unexpected windfall (such as a bonus at work or lottery winnings), you could choose to put a chunk of that toward your mortgage payment. Alternatively, you could choose to bump up your monthly mortgage payments. Just be sure, however, that you are still able to address your other financial obligations and needs - paying down high-interest debt, covering other fixed expenses and contributing regularly to your emergency fund and retirement investments.
Alternatively, you could choose to refinance your mortgage and opt for a shorter term. Choosing to repay your mortgage over a 15-year term instead of the traditional 30 years may pay down the principal of the loan faster, causing your equity to accrue faster. If you choose to do this, however, it’s important to account for any associated costs that come with refinancing.
Whether or not you were able to make a large down payment, there are still ways to build equity in your home. Building equity is an important part of protecting your investment, and it provides you with a safety net should you need to borrow against it in the future.
Of course, before you make a final decision about any strategy - we encourage you to talk with your financial advisor!