Building equity in your home is one of the many benefits of homeownership. After all, the more equity you have, the more financial freedom and security you can enjoy. Nonetheless, many new homeowners know very little about home equity or how to build it.
What is Home Equity?
Simply put, home equity is the value of your home compared to how much you owe. If your home is worth $200,000 and you still have $150,000 to pay toward your mortgage loan, you have established $50,000 in equity. Many new homeowners start with at least a small amount of equity, as your down payment immediately translates into equity. In other words, if you pay 10 percent of the home’s value as a down payment, you have already built 10 percent in equity.
How Do I Build Equity?
There are many ways that you can increase the amount of equity that you have with your home. Perhaps the simplest way to achieve this is to make a larger down payment when you purchase the home. Of course, this may not be in your best interest in terms of the bigger picture, as it may make more sense for you to use that money toward other things. If you enjoy a financial windfall later, such as an inheritance or work bonuses, you may want to apply that toward your mortgage loan so you can increase your equity.
Another option is to simply increase your mortgage payments or the amount of payments you make. For example, you may make a mortgage payment every two weeks rather than once per month in order to build your equity more quickly. As an added bonus, this can help you shave five to six years off of a 30-year mortgage loan. Alternatively, you may take out a 15-year mortgage instead of a 30-year mortgage, which will help you build your equity twice as fast. Just remember that this will result in a much higher monthly mortgage loan payment.
Aside from increasing payments or modifying your payment plan, you can increase your homes equity by taking steps toward generally increasing its value. Major improvements such as adding a new bathroom and making kitchen improvements will help to increase the value of your home.
Of course, the value of your home will also increase with the passage of time. How much your home appreciates over time and how quickly the value increases will be dependent upon the market. According to a recent Zillow report, the median value of a home grew from $185,000 in April 2016 to $216,000 in April 2018. That is a significant amount of market appreciation that simply translates to more equity for you.
How Do I Use My Equity?
The equity that you build in your home can be used for many purposes. For example, you may use it to help to pay for college, to pay off medical bills or even to make additional improvements to your home. You may do this by taking out a home equity loan for a specific amount of money to go toward a specific purchase or you may choose to pursue a cash-out refinance of the home. Another option is the home equity line of credit (HELOC), which allows you to borrow against your line of credit on a rotating basis in the same way as you would use a credit card.