We know that real estate is one of the best long-term investments you can make, and one of the reasons is that by owning real estate, you are building home equity that you can use as a resource for the future. Home equity represents the amount of home that you own without financing, and the more your home equity grows, the more you can turn it into cash as a financial resource for future expenses.
You can calculate your home equity by finding the difference between your home’s market value and what you still owe before paying it off in full. For example, if your home has a market value of $750,000 and you still owe $500,000 on your mortgage, your home equity is $250,000.
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Do you really need to know how much equity you have?
Knowing your home equity amount will definitely benefit you in the future, especially if you’re applying for home equity loans or lines of credit (the more equity you have, the more credit). Earning equity makes your home a more meaningful asset as time goes on.
Growing your home equity can be done in several ways and has a variety of advantages.
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Reasons to Build Home Equity
Building home equity is a great way to make the most of your real estate investment, and can require as much or as little work as you prefer.
Use Home Equity as a Financial Resource
Equity becomes a resource that you can tap into to borrow for many purposes. Homeowners can borrow against the value of their home if they have enough equity and use equity loans and lines of credit to help during unexpected financial situations, or to simply fix up their home (and build even more equity in the process!).
Home equity loans typically have a repayment period of 10 to 30 years.
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Make a Profit When You Sell
Home equity also increases your chances of turning a profit if you decide to sell your home down the line. With the proper amount of equity, you won’t owe more than you can make back on a sale. Equity allows you to sell the property for more than you owe and use the profits to pay off debts, invest elsewhere, or purchase another home.
Build Long-Term Wealth
Equity will help you build long-term wealth, even if you take little to no action, especially in a hot seller’s market like Seattle. Home equity is one of the only assets that increases in value as you pay your mortgage down.
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How to Build Home Equity
Although simply paying off your mortgage is one way to slowly build your home equity, you can also take action to earn more equity by doing the following.
Make a Large Down Payment
Kickstart your equity journey by making a large down payment. Many people follow the 20% down way of thinking when it comes to mortgages, and though there are options for low (or no) down payments, paying a larger percentage can work to your advantage.
If you put down more than 20%, you can avoid having to pay private mortgage insurance (PMI), instantly boost your equity, and get off on a running start. Be cautious of spending outside of your budget, though, and be sure to have enough cash reserves for emergencies, repairs, living expenses, and future mortgage payments.
Make Home Improvements
Making home improvements to your property can help boost your home’s value and equity — while at the same time making your home a better place for you to live.
Make sure to research or speak with a real estate agent or home improvement professional to see what types of renovations will give you the best return on investment (ROI), and be sure to consider the costs of these projects.
Pay More Monthly
If you pay extra toward the principal on your mortgage each month, you can quickly increase your equity by decreasing the total you own on your home. Look at your monthly mortgage statements each month to make sure that the extra money you’re putting toward your principal is actually going to the right place, and talk to your loan officer to ensure you’re taking the right steps.
You can also choose to pay bi-weekly rather than once a month to squeeze in one extra payment per year. If you don’t want to commit to a larger set amount, simply throw extra money when you have it toward your principal on your mortgage.
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Wait and See
If nothing else, waiting for your home’s value to rise and continuing to make your mortgage payments works as well.
Home prices in different locations can fluctuate, so you may be living in an area that could see a drastic growth in demand, therefore increasing your home’s value and boosting your equity. You can check your home and neighborhood’s value statistics — as well as predictions — on sites like Zillow and Redfin.