One of the primary goals of homeownership should be the building of equity in your home. Equity is simply the difference between the current value of a property and the balance of all mortgage obligations.
For instance, if your home is valued at $375,000 (based on an appraisal or a Comparative Market Analysis) and you owe $175,000 on your mortgage, you have $200,000 in equity. As long as the real estate market remains stable, this equity is essentially like money in the bank. Over time, as the value of your home appreciates and your mortgage payments reduce your debt, your equity will continue to grow.
Why Equity in a Home is Important
The appreciation of equity in a home is one of the most effective and relatively painless paths to wealth. By simply making the mortgage payments you would make anyway, you reduce your mortgage balance, while the value of your home increases. This process allows your wealth, or “nest egg,” to grow. The sooner you reach 100% equity—owning your home outright—the sooner you can enjoy less financial stress and true wealth.
How to Build Additional Equity
There are several strategies to build additional equity in your home. Some are easier than others, but all are effective:
- Higher Initial Down PaymentOne of the most straightforward ways to build additional equity is by making a larger down payment at the time of purchase. This extra money is immediately “banked” in the home, reducing the temptation to spend it elsewhere.
- Extra Principal PaymentsMaking extra payments on your mortgage principal—or adding money to your monthly payment specifically designated for the principal—has a double effect on your equity. Every dollar you contribute reduces your debt by the same amount. Additionally, as your debt decreases, you pay less in interest, which means more of your monthly payment goes toward the principal, accelerating the growth of your equity.Note: While most loans allow extra principal payments, check with your lender to ensure there are no penalties for doing so.
- Shorter Mortgage TermOpting for a shorter mortgage term, either initially or through refinancing, can help you pay down your principal much quicker. This approach accelerates the accumulation of equity, as you reduce your debt faster.
- Home ImprovementsImproving your home’s quality or size can also increase its value and, consequently, your equity. However, not all home improvement projects are equal in terms of return on investment. Traditionally, remodeling kitchens or bathrooms has brought a greater return than adding leisure amenities such as pools or whirlpools. To maximize equity enhancement, ensure that the improvements you choose will significantly boost your home’s value.
Conclusion
Building equity in your home is a key component of financial stability and wealth creation. By taking steps to increase your equity, such as making a larger down payment, paying extra toward your principal, opting for a shorter mortgage term, and investing in strategic home improvements, you can accelerate your journey to owning your home outright and achieving financial security.
For more personalized advice, contact Jackie Magas at 905-630-0009.
