For today’s blog post, let’s dig into home equity, or your personal financial investment in your home.
More home equity is always the goal, no matter how you gain it.
Home equity equates to your home’s market value, minus your mortgage balance and any liens. For most people, it plays a big role in your total net worth, serving as an asset you can use when you’re ready to sell or to take out a second mortgage.
Note that equity is not the same as your net proceeds. When you sell your home, you pay closing costs and other transaction fees. These costs, then, are taken out of your equity, decreasing your total profit.
As a homeowner, there are three ways to increase your home equity.
1. Mortgage payments
When you make a mortgage payment, the money goes towards principal and interest. In some cases, it also pays for property taxes and homeowner’s insurance. Ultimately, it’s the principal portion that builds your equity.
In the beginning, the majority of your payment goes to your lender as interest. An amortization schedule shows the changes in interest versus principal payment over time. At some point, your payment will shift towards principal, which increases your equity faster. The timing of this shift depends on your interest rate and the length of your loan.
2. Market appreciation
During a healthy housing market, your home’s value naturally increases over time. How much equity you gain (and risk losing!) depends on when you buy and sell. For instance, if you buy at the height of the market and then want to sell during a recession, you may end up with negative equity, which is when you owe more than your home is worth. Be smart about your timing, and let the housing market work with you, not against you!
3. Home improvements
Finally, your equity increases with new appliances, renovations, additions, and landscaping — as long as they’re done in a strategic way and with budget in mind. The most popular and worthwhile home projects include kitchen and bathroom remodels, exterior updates, and finished basements.
Home maintenance matters too. Be sure to change your air filter every month and get your HVAC system professionally serviced twice a year. Get your roof inspected each year. Keep up with your lawn care too. This upkeep is part of being a good homeowner, which, in turn, increases your home’s value and thus your equity.
To close, it’s easy to see why home equity is very important!
When you purchase a new home, your home equity is simply your down payment amount. As you pay off your mortgage loan, any money that goes towards your principal increases your equity. Your equity also increases as your home’s value increases, either because of the market or with home improvements. When you make a smart decision about home buying, you immediately start gaining equity!
Let The Urban Dog Group help you with your real estate needs. Contact Christine Elias at caerealestate@gmail.com.