There are many benefits to buying a home, and one of the biggest is your home’s equity. Home equity can be built over time and can then be tapped into for large payments down the road. But what exactly is equity? This post will go over the basics of home equity and why it’s valuable.
What Is It?
The simplest definition of home equity is the difference between what you owe for your mortgage and what your house is worth. For example, if you owe $100,000 on your mortgage and your house is worth $300,000, then you have $200,000 of equity.
There are two ways for your home equity to increase. The first way is simply paying off your mortgage and your amount of equity will gradually rise over time. Your equity will also grow if your house jumps in value.
Your home equity can decrease too. If your home value decreases faster than you are paying your mortgage’s principal balance, then you will lose equity.
How To Build Home Equity
There are a number of ways you can build your home’s equity.
Make a big down payment: The fastest way to build equity is by making a bigger down payment. The bigger your down payment, the more equity you’ll own right away. For example, if your home costs $100,000 and you made a $10,000 down payment, you’ll have $10,000 in equity. Instead, you could pay $20,000 down and get $20,000 in equity right away. Of course, make sure you’re staying within your budget, and get preapproved for a mortgage so you’ll know how much you’ll have to save beforehand.
Pay off your mortgage: A portion of each of your mortgage payments goes towards your principal balance of your home loan, and the rest usually pays for interest, property taxes and insurance. At the beginning, a smaller portion goes toward reducing you principal balance and a bigger amount goes toward your interest. However, the longer you have your mortgage will result in more money going towards the reduction of your principal balance and building your equity. Unfortunately not all loans work this way, so weigh all your options before you select your loan.
Pay more than the minimum: Another quick way of building equity is paying more on your monthly mortgage payments. Even if you’re paying an extra $100 a month or making an extra payment each year, you’ll chip away at your mortgage and increase your equity at a faster rate.
Live in your home for 5+ years: Equity increases if your home’s value increases, but there’s no guarantee that the price will jump. However, your odds will increase if you live in your house for five years or more, so plan on living there for that time if you want to see a value jump that will gain you more equity.
Curb appeal and renovation: You can boost your home’s value by renovating outdated rooms and appliances or adding new rooms. You can also improve your yard by adding more plants or trees to help boost your home’s curb appeal.
