How to Build Home Equity Like an Expert
Buying your first home is an investment, and a major one at that. However, building home equity along the way is one of the biggest differences between homeownership and renting, and it can really pay off – whether in the form of your children’s future education, your retirement savings, or even your next house. That means building home equity through your first real estate purchase is like giving yourself a huge financial high-five.
How do I Get My Hands on “Home Equity?”
Once you’ve moved into your home, it’s time to brainstorm ways to make your new most valuable asset even more valuable. That means thinking about your equity. In a nutshell, home equity is the amount of your house that you actually own–meaning the home’s market value minus the balance of your mortgage loan.
You’ll have to work your way up to building home equity; at the beginning of your mortgage, more of each monthly payment will go toward interest than principal, which won’t contribute much to equity. However, as times goes on, you’ll build equity as more of each monthly payment goes toward principal. The more equity you have, the more you’ll benefit in the long run: when you decide to sell your home, equity is the amount of money you’ll have left after the sale.
Paying Off Your Debt, Well, Pays Off
Decreasing debt is one way to build home equity, and that means the terms of your mortgage loan play a big role. For instance, choosing a mortgage loan with a 15-year term will allow you to pay off your debt faster, and thus build equity sooner. However, the monthly payments will be higher than those for a mortgage loan with, say, a 30-year term, so be sure you can budget accordingly.
To build home equity even faster, you might consider paying a little extra each month; even if it’s just a dollar or two added to your monthly payment, it can really add up. And, if you can swing it, making one extra mortgage payment per year can also pay real dividends.
Boost Property Value to Build Home Equity
In addition to decreasing debt, increasing property value is a key way to build equity. And, since equity depends on your home’s value, the housing market can have a huge impact. For example, if the market spikes, so will your property value. Of course, that’s a luck-on-your-side kind of situation.
If you don’t want to trust your luck in the housing market, you can still increase property value with strategic home improvement. It’s a win-win: the updates will make your house more comfortable, and they’ll build equity. However, you don’t have to do something drastic like a full kitchen remodel; you can make easier, strategic equity-building updates. After all, some of the easiest–and cheapest–home improvement projects come with the biggest ROI. You’ll get solid bang for your buck by simply decluttering your house, replacing broken light bulbs, cleaning windows and skylights, and doing some basic yard maintenance.
What Do I Do With All This Equity?
In the end, home equity has cash value. So if you sell your house, you’ll have money to spend. You can also put your equity toward purchasing your next home, which means you could be able to size up or take out a smaller mortgage than the first time around.
There’s also the option to tap your equity without selling your home. You can do so by refinancing and taking cash out. You can also open up a home equity line of credit, which is a lot like a credit card and lets you gradually withdraw funds. Though it may be tempting to spend the money on something fun like a new car, it’s best to save the money for emergencies; you might find yourself in a big financial hole if you don’t pay it back within five or 10 years2. Or, if you’re thinking really long term, you could use your home equity to help fund your retirement. Some parents even fund their child’s college education with home equity.
Just think: a diploma made possible by a smart real estate investment. Isn’t homeownership an incredible thing?