What Is Home Equity and How Can I Build It?
October 6 2021 Posted by Jeremy Schaffner
Home equity is an essential asset for creating wealth and income. Learn how home equity is calculated, why it's important, and five steps you can take to build it.
As you make monthly mortgage payments, you accumulate home equity. This is a powerful real estate investment that represents the portion of your home that you own. This portion is free from financing and appreciates in value over time.
To determine your home equity, you subtract your mortgage balance from the market value of your home. For example, suppose your home is worth $300,000 and your mortgage balance is $200,000. In this case, your home equity is $100,000 (i.e., $300,000 Ė $200,000).
Why Building Equity in Your Home Is Important
Home equity is a real estate investment that you can convert into cash by using it to access credit or cashing it in when you sell the home. Real estate professionals, therefore, encourage homeowners to keep track of their home equity since its important and one of their main assets.
Moreover, you can use it to determine how much credit you can access because lenders use it to set borrowing amounts. More equity gives you access to more credit. Building home equity is beneficial in three important ways.
∑ It enables you to profit from the sale of the home.†Home equity enables you to sell your home for more than you owe.
∑ It enables you to accumulate long-term wealth.†Home equity appreciates over time
For these reasons, savvy homeowners are always looking for ways to build their home equity. Let's take a look at a few ways to build up your home equity.
5 Ways to Build Your Home Equity
Given that the value of home equity is obtained from subtracting the remaining portion of your mortgage debt from the current market value of the home, there are only two fundamental ways of building this real estate investment: decreasing your mortgage debt or increasing the value of the home.
Real estate professionals recommend the following ways to increase your home value or reduce your mortgage.
∑†Property Value.†One effective way to increase the value of your home is by making essential home improvements through renovations and remodeling.
∑†Mortgage Principle.†Increase the portion of your monthly mortgage payments that go toward repaying the principal amount to build your home equity faster.
∑ Replace your current mortgage loan with one that has a shorter repayment period to increase the amount of principal payment you make monthly.
∑ Wait as long as possible before you sell the home to maximize the appreciation of its value.
Taking these steps will help to optimize the growth of your home equity in a way that fits your current lifestyle and aligns with your long-term financial goals.
An Indispensable Asset
Home equity is an essential asset that enables you to build long-term wealth and make a profit. Building it takes patience and sacrifice, but it's worth the effort. The steps we outline in this article will enable you to grow the investment you made in your home and leverage it to build wealth.
All the steps you can take to build your home equity come down to either increasing the value of your home or reducing your mortgage debt. These steps include paying a large downpayment, making valuable home improvements, paying more toward the mortgage principal, and waiting for the home's value to appreciate.