You’ve undoubtedly heard of equity concerning homeownership. You may even have heard that it is one of the most significant benefits of owning a home. However, do you genuinely understand what equity is and how to build it as a homeowner?

What is Equity?

In the simplest terms, equity is the difference between what you owe on your mortgage and what your home is currently worth. So, if you owe $200,000 on your mortgage and your home is worth $250,000, you have $50,000 of equity in your home. 

There are two basic ways to increase your equity. One is to pay down your mortgage; the less you owe, the higher your equity. Your equity will also rise if the value of your home increases. Conversely, your equity can drop with the value of your home. 

Why Build Equity?

Many homeowners rely on equity, as it can be used for retirement with a reversed mortgage rate. This allows you to stop making monthly mortgage payments. Instead, you will receive payments based on your equity. However you plan to accrue and use your home’s equity, there’s no time like the present! Build your home’s equity and invest in your future. It comes in handy if you want to sell your current home and upgrade to things bigger and better.

How to Build Equity

There are many ways to build equity in your home. A combination of these techniques will help you build upon that quickly and easily.

1. Make a Big Down Payment

This method helps you increase equity right out of the gate when you purchase your new home. It makes sense that the higher your down payment, the higher your equity. For example, if you put down $5,000 on a $200,000 home, automatically you will owe $195,000 on your mortgage. But if you put down $20,000, you’ll only owe $180,000, meaning your equity is higher. 

2. Pay off your Mortgage

A portion of each mortgage payment that you make will go toward paying off the principal balance of your home loan. The remaining will cover interest, property taxes, and homeowner’s insurance. The more you pay, the more it will go towards your principal. 

3. Pay Over the Minimum

If you want to build equity more quickly, you can always pay off more of your mortgage than what is required each month. Remember, the goal is to pay off the principal balance of your home loan.

4. Stay in Your Home

You will build equity if your home increases in value. There is never a guarantee that this will happen, but your chances are greater the longer you stay in your home. It’s a good rule of thumb to plan on staying in your home for five years or longer if you want to see a jump in equity.

3. Renovate

An increase in equity and your home value, go hand in hand. Redoing a bathroom or kitchen, adding a room, or updating your landscaping can all boost your home’s market value and help you build equity. Keep in mind what high-quality upgrades a buyer might be interested in, like granite countertops or hardwood flooring.

Depending on your current position as a homeowner and any recent renovations made to the home, your equity could have gone up without even knowing it. While we hope this talk has given you insight on equity, keep in mind that reach out and ask any questions regarding your home value now.