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Building Equity in Your Home 101

Updated: Oct 13, 2020

Like a saving account, equity in your home is an important financial resource for you and your family. The market value of your home less the money you owe on it, is the equity you've built in your home. As the months and years go by and you continue to make payments on your mortgage loan, the equity you have in your home goes up, because the difference between the market value and what you owe becomes incrementally bigger. That difference is the money you will be able to retrieve from your home once you go to sell it. And although having your money tied into your property is a wonderful way for you to save and grow your wealth, should you need your funds for an emergency or a large capital expenditure you can access your equity via a home equity loan or line of credit.

The best thing about this investment is that you can manage your return on investment (ROI). There are ways to build more equity in your home while you're paying it off and enjoying the comforts of homeownership. You can increase the value of your home, become educated on the benefits of choosing the smartest mortgage plan, and work to bring your principal (owed loan value) down.

To increase property value, you could think about remodeling your home.

When looking into home improvements, you have to be careful as not all home improvements necessarily add value to your home. For example, say you spent $50,000 to $100,000 to put a pool in the backyard (which is actually around what you'd end up spending). But maybe people looking for homes in your area aren’t looking there for homes with pools, so the pool might only add around $40,000 to the market value price, once professionally appraised. This is because one of the methods appraisers use when calculating the value of your home is the sales comparison approach which involves looking at homes with similar criteria to your home and observing what current home buyers are willing to pay. Especially if a lot of these new homebuyers are families with small children. It might not be worth the risk for them to have a pool in the backyard. New and trendy kitchen appliances or an excellent paint job, could however make for a nice ROI and attract more buyers.

You can bring your mortgage down by qualifying and choosing a mortgage plan that allows you to pay off your loan much faster. Paying more on your downpayment can be extremely wise too if it’s an option for you. By putting down 20% you’ll avoid Private Mortgage Insurance (PMI) which just adds extra fees to your monthly payment. Lenders look at how much you make in order to determine if you can afford the loan. A lender will usually permit you to spend 43-49 percent of your monthly income. If you can swing it budget-wise, getting a 15 year mortgage as opposed to a 30 year one, would allow you to build equity twice as fast and save you a lot of money. Keep in mind, however, that your monthly payments would be much higher.

Refinancing or paying more each month on top of your monthly payments to go straight to the principal will help escalate your equity down the road. The principal is the actual amount you owe on your loan excluding the interest you've been paying. Whenever extra cash comes into your life, whether through an inheritance or bonus, it is always a good idea to put that towards your principal, as it will end up saving you money and time paying off your loan in the long run.

Homes tend to appreciate over time due to our excellent current market, so chances are you will see the equity in your home rise over the time you've owned it. A Zillow report shows home values have gone up 7.4% in the just the last year. While COVID-19 has introduced a level of uncertainty into the housing market, so far housing prices haven't dropped. This is all to say that homeownership is an incredibly smart and rewarding investment and there's plenty you can do to maximize your return on it while you enjoy the comforts of homeownership.

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