🏠 EQUITY 🏠
“Equity is the difference between what you owe on your mortgage and what your home is currently worth. If you owe $150,000 on your mortgage loan and your home is worth $200,000, you have $50,000 of equity in your home.”
Your equity can increase in two ways. As you pay down your mortgage, the amount of equity in your home will rise. Your equity will also increase if the value of your home jumps.
It can fall, too, if your home’s value drops at a rate faster than the speed at which you’re paying down your mortgage’s principal balance.
How Does Home Equity Work?
Here’s an example of how equity can change over time.
Say you buy a house for $200,000. You might come up with a down payment of 10% of your home’s purchase price – which would be $20,000. Your lender will then provide you with a mortgage loan of $180,000.
If your home is worth that $200,000 sales price, you now have $20,000 of equity, or $200,000 minus $180,000.
Jump ahead 2 years. You’ve been making your mortgage payments on time, and you might now owe $170,000 on your mortgage. Maybe your home’s value has jumped too during this time to $210,000.
You now have $40,000 in equity, or $210,000 minus $170,000.
Your home’s value could work against you, too. Say you’ve paid down your mortgage loan to that same $170,000, but your home’s value has actually dipped to $195,000. Now you have $25,000 in equity, or $195,000 minus $170,000.
To determine your equity at any one time, you’ll need to know the value of your home.
Only a real estate appraiser can give an official valuation of what your home is worth in today’s market. You can, though, estimate your home’s value by looking at comparable home sales in your area or by checking with online real estate sales that provide their own home value estimates.
Just remember that these estimates aren’t always accurate and exist just to give you a rough idea of your home’s current worth.
How To Build Home Equity
Fortunately, there are a number of ways you can build it up in your home.
Make A Big Down Payment
The fastest way to build equity is to come up with a large down payment. The bigger your down payment, the more equity you’ll immediately have in your home.
Say you buy your home for $180,000. If you put down $5,000, you’ll owe $175,000 on your mortgage. That leaves you with $5,000 in equity. If you put down $20,000, you’ll owe $160,000 on a home worth $180,000. That $20,000 in equity is far more impressive than $5,000.
Focus On Paying Off Your Mortgage
When you first start making your mortgage payments, a smaller amount will go toward reducing your principal balance and more will go toward your interest. The good news, though, is that the longer you have your mortgage, the more money will go toward reducing your principal balance and building your equity.
But it’s important to be aware that some loans don’t operate this way.
If you take out an interest-only or other non-amortizing mortgage, you won’t reduce your principal balance or build equity. Instead, your payments will only go toward paying your interest, property taxes and insurance. Eventually, you’ll need to pay a lump sum to pay off your principal balance.
Pay More Than The Minimum
If you want to build equity more quickly, you can always pay more than your required payment each month. Making an extra payment each year on your own or through biweekly payments or even paying an extra $100 a month can help you chip away at your loan’s principal balance as well as help homeowners increase their home equity at a faster rate.
Stay In Your Home 5 Years Or More
You’ll build equity if your home increases in value. Of course, no home is guaranteed to see its value jump, but you will increase your odds if you stay in your residence for a greater number of years.
Plan on staying in your home for 5 years or more if you want to see its value jump enough to give you an equity boost.
Renovate And Add Curb Appeal
You can help boost your home’s value by adding an extra bedroom, renovating that old kitchen or adding a master bathroom. Investing in landscaping and giving your home curb appeal can help too.