One of the benefits of purchasing a home instead of renting one is that it gives you an opportunity to build equity you can use to pay for other expenses. Essentially, equity is the part of your home that you’ve already paid for. It’s equal to the fair market value of your home minus the amount of money you still owe on the mortgage. For example, if your home is worth $500,000 and you owe $350,000 on your mortgage, you have $150,000 worth of equity in your home.
Increasing the Amount of Home Equity You Have
In general, there are two ways you can build equity in your home. The first is to reduce the amount you owe. Each month you pay your mortgage, you build a little more equity. You can increase your equity more quickly by making extra mortgage payments throughout the year. Or by getting a mortgage with a shorter term (e.g. 15-year mortgage vs. 30-year mortgage). Not only will you pay off your loan more quickly, but you’ll probably pay less in interest.
The second way to build equity is to increase your home’s value. As the value of your home increases, so does your equity. In many markets, home values naturally increase over time, but that’s not true everywhere. In some markets, home values stay relatively even and in others, values may decrease. Typically, home values increase most rapidly in markets that are attractive to buyers or where demand is greater than the supply of homes for sale.
If you don’t want to wait for your home to increase in value because of market conditions, you can increase the value by making home improvements. According to Remodeling’s 2018 Cost vs. Value report, the five home improvement projects that deliver the biggest return on investment are:
- Garage door replacement (98.3%)
- Manufactured stone veneer (97.1%)
- Entry door replacement (steel) (91.3%)
- Deck addition (wood) (82.8%)
- Minor kitchen remodel (81.1%)
But it’s important to remember that the amount of money you can expect to recoup varies based on your location and the details of your specific project.
Why Home Equity Matters
Accumulating equity in your home is one way to build wealth. You can use that money to pay for a variety of other expenses, including home improvements, medical expenses, a vacation property, starting or funding a business, consolidating higher interest debt and much more. You have the flexibility to use the money in a way that works best for you and your family.
Ways You Can Access the Equity in Your Home
You can access the equity in your home by securing either a home equity loan or line of credit. For more information on how you can put your hard-earned equity to work for you, contact one of our HELOC specialists at 805.477.4522 or apply online at any time to get started.