Does Your Home Have Equity?
What is Equity? Equity is the amount of your home that you actually own after accounting for debt. To calculate that value, subtract your loan balance from the market value of your home.
Example: Your home is worth $250,000, and you owe $100,000 on your mortgage. $250,000 minus $100,000 equals $150,000 of equity in your home.
Building equity is one of the primary financial benefits of homeownership. You don’t notice it while it’s happening, but if all goes well, you end up with a significant asset that you can use for almost any financial need.
What can you do with your equity? Equity is a valuable asset, and it can enable you to:
How to Build Equity The more equity you have, the better off you’ll be. There are two basic ways to build equity in your home:
Increase the Property Value Your home’s market value is an essential component in your equity calculation. If the home’s value rises, you instantly have more equity. So, what makes home prices head upward?
Home improvements: You can also invest in your home to increase its value. Updating kitchens and bathrooms, improving landscaping, and investing in energy-efficient upgrades can all payoff. But those projects cost money upfront and you need to be confident that you can more than recoup those costs. If you’re making improvements with the primary goal of building equity, select projects with the highest return on investment (ROI). Don’t automatically assume any improvements—cosmetic or otherwise—will lead to higher property value.
Upkeep: Routine maintenance is tedious (and it costs money), but a home that’s falling apart is not appealing to potential buyers. If you fail to address maintenance issues like leaks and deteriorating roofing, your home equity may decrease over time. Plus, in the event you decide to sell your home, you may need to spend the money in order to sell it anyway.
Make extra payments: Even if you have a 30-year mortgage, you can speed things up by paying extra amounts. There’s no law that says you must pay only the amount dictated by your 30-year mortgage agreement. Each additional dollar you pay above your required monthly payment reduces your debt and adds to your equity—just make sure your lender applies those payments to the principal. Nothing is stopping you from setting up a 15-year repayment schedule (see the link to the amortization table above) and making those bigger payments on your 30-year loan. A positive aspect of this option is that if things change at some point and you can’t afford the higher payment, you have the flexibility to return to the smaller 30-year payment.
I hope you found this information empowering! I would love to know your thoughts and any questions you may have, in the comments below!
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