4 Ways To Build Home Equity

 

Before we get too far into the details of how to build equity in your house, let’s answer a common question. What is home equity? Simply put, home equity is the difference between what is owed on the home and the home’s fair market value. Essentially the part of the home you own free and clear. And, calculating your basic equity is quite simple. Let’s say your home is worth $500,000 and your mortgage has been paid down to $300,000…the equity in your home would be $200,000.

 

Now that you’re more in-tune with what home equity is, let’s talk about how to build it:

 

Build Home Equity With Your Down Payment

Simply put, the larger your down payment the more equity you will have in your home right off the bat. While we do recommend putting down as much money as you can, it’s very important that you also consider your long-term financial goals as well. Take a holistic view of your finances, considering your monthly budget and rainy day savings, and then come up with a value that is great for your home equity and your day-to-day living.

 

Increasing Equity Through Home Renovations

The old saying ‘you have to spend money to make money’ rings true for this home equity tip. But, you must do it in a calculated way. If redoing your kitchen will increase the value of your home, but you spend $50,000 doing it – you’re basically no better off than when you started. However, if you’re strategic with your spending and only forked out $20,000 for the same value increase, you would see an increase of $30,000 in your home equity. Pro tip: before you get started on any substantial reno projects you first want to consider how it will increase the value of your home and then set your budget accordingly.

 

Using Your Mortgage Payments To Build Equity

Something as small as changing the frequency of your mortgage payments can drastically help to increase the equity in your home over the long run. There advantages to bi-weekly payments including paying off your home faster, building equity at a much quicker rate and paying less interest on your mortgage overall.

Why is this? When you are on bi-weekly payments it actually works out to you having 13 months of mortgage payments withdrawn in a calendar year. This simple change can knock a whopping 7 years off of a 30-year mortgage term. However, we must tell you to use caution when going this route. Talk to your lender to ensure that you are on true bi-weekly payments and not simply having your monthly mortgage payment withdrawn in two transactions as that will not decrease your principal value faster.

 

Home Equity By Appreciation

One of the most straightforward ways to build home equity is through appreciation. And, no we don’t mean showering your home with compliments. Appreciation is pretty natural in any type of real estate investment and is classified by your property increasing in value year-over-year.

 

Let’s use the Durham Region as an example. While Durham’s property values have had some small ups and downs this year, overall the value of homes is way up in comparison to 5-10 years ago. This means that anyone who bought their home 5-10 years ago likely has a substantial amount of equity in their home, all thanks to the market boom we saw last year.

 

How To Access Your Home Equity

Now that you’ve got some equity in your home, you might be wondering how to access it. There are two common routes to take here. You could sell your home and downsize to home with a lesser price point so that you can access the profit in your home. Or one of the most common ways is a home equity loan or home equity line of credit (HELOC). You might know it better as a second mortgage. For a more in-depth look at home equity loans check out our blog post Your Guide To Home Equity Loans.