Homeowners are familiar with the term equity, but what does it mean and why is it important?
Equity is the difference between the current value of your home and the balance remaining on your mortgage. For example, if your home value is $200,000 and you owe $150,000 on your mortgage, your equity is $50,000. The primary goal of homeownership should be to build as much equity as you can to gain financial security and strength.
Generally, home values appreciate each year, which in turn increases your equity, but there are several other ways to build equity as well.
Higher Initial Down Payment
Making a larger down payment on your home is the first opportunity to build additional equity. For instance, if you put 20% down on your mortgage when you purchased or refinanced your home, you instantly had 20% equity.
Home Improvements
By improving the quality or size of your home, you increase its value which increases your equity. Remodeling your kitchen or bathroom will generally provide the greatest return on your investment, but speak to a real estate expert in your area to determine the value of your improvements.
Extra Principal Payments
By adding money to your monthly payment and designating it to be applied to the principal balance, you are affecting your equity in two ways. First, each extra dollar you put toward the principal balance lowers your amount owed and increases your equity. Secondly, lower debt means less interest paid over the life of the loan, which translates into more of your monthly payment going to the principal balance.
Shorter Mortgage Term
By reducing your mortgage term from the traditional 30 years down to 25, 20 or 15 years, you will be paying down the principal balance a lot faster and gaining equity faster too. Not to mention that lower terms tend to have lower interest rates, so you’ll be paying less in interest over the life of the loan.
Lower Interest Rate
Interest rates are at historic lows, meaning that less of each monthly payment is going to interest and more is going to pay down the principal balance. The lower your principal balance goes, the higher your equity becomes. If you have been waiting to refinance, you should consider speaking to an expert today. The more quickly you refinance and take advantage of the low rates, the faster you build your equity.
Building equity in your home is one of the easiest and most successful paths to financial wealth and stability. Invest in your future by taking advantage of the various ways you can maximize the equity in your home.
