How Equity Works and Ways to Increase it

hand holding money with houses on it

After the ordeal of becoming a homeowner, it’s time to reap the benefits. While navigating through the home buying process, you might’ve heard about something called Home equity. Home equity is the most valuable asset to a homeowner, as it opens up possibilities such as buying another property without any cash deposit or covering up your child’s college tuition. So, understanding how it works is of utmost importance. We’ve also included some tips on building it more efficiently and quickly for you.

First off,

What is Home Equity?

Simply put, home equity is the difference between what you owe on your mortgage and the value of your house. Take for example that you bought a house valued at $200,000 and you deposited $50,000. Now you have $150,000 remaining on the mortgage and your equity will be $50,000. The lender has an interest in the property when you borrow money to purchase it even though you’re considered the homeowner.

How Equity Works

Home equity loans are secured by real property which is a high-quality form of collateral, thus lenders are more confident in lending you money. The higher your equity, the more assured lenders are that you’ll pay them back.

Your home equity also increases as the value of your home rises but the main loan balance remains the same. Let’s say in 2 years, your home’s value rose to $210,000 and you owe $140,000. Then your equity will be $70000. You’ll need to know your house’s current worth to calculate your house equity at a particular time. For an exact valuation of your home in the present market, you should consider consulting a real-estate appraiser. Factors like income, expenses, debt, whether you have Lenders’ Mortgage Insurance (LMI), house size, location, etc., will be assessed during the valuation.

Having said that, you can always review comparable home sales in your area or research for online property sales that include their home values, for an estimate of the value of your home. But bear in mind that these figures may not always be accurate and merely exist to give you a rough measure of the value of your house.

How to Increase Home Equity

Pay attention to mortgage repayments:

In general, you increase home equity as you make repayments. Your loan repayments will go, in equivalent parts, towards the principal balance of your home loan and paying interest. With time, the amount that goes towards reducing your principal loan balance will increase, and so will your rate of building home equity.

However, with interest-only loans or some other type of non-amortizing loans, building equity is a little different. Here, your repayments will go towards paying off the interest while you may have to reimburse with a lump sum to pay off the main loan balance.

Deposit a massive down payment:

It’s pretty simple. The higher your down payment, the more equity you will have on your home right away.

Make regular and larger repayments:

A key way to build your house equity quickly is by paying more than the required payments each month. Paying an extra amount each year on your own or even an additional $100 a month can help you chisel down the main loan balance faster and subsequently increase your equity.

Renovate your house:

As you can see, your home’s value is concomitant with your home equity. You can increase the value of your home through renovation projects. Adding a master bedroom, refurbishing the old kitchen, or adding an extra bathroom, can help in enhancing your home’s value and consequently your house equity. You can also invest in landscaping and the curb appeal of your home for an extra boost.

By now, you must’ve understood that equity is an asset and therefore forms a good portion of your net worth. If the need arises, you can withdraw a partial or full sum from your house equity, or you may transfer it over to your heirs. Nonetheless, building your home equity is always beneficial.

Author:

Kiran Thapa

Seema Lama

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