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You hear people talk about the amount of equity they have in a house, but what does equity really mean? When we’re talking about houses, equity is what the home is worth minus how much you owe on it.
If you purchased a $200,000 home and put 5% down ($10,000) then you start out having 5% equity in the home. Value of the home – Debt attached to the home =Equity
The goal is for your home to be worth more than what you owe and for your equity to continue to grow over time. Equity grows by paying down your mortgage loan, maintaining and/or updating your home, and the value of your home going up.
- Paying down your loan – Building equity can be as simple as making your mortgage payments! If you’re looking to do a little more, consider rounding up on the amount you pay on your monthly mortgage payment. Talk to your lender about the advantages of paying ½ of the payment biweekly instead of a full payment monthly. Also, consider making one additional principal payment a year. Lots of these things can take years off of your overall loan.
- Maintaining your home – By maintaining your home and keeping everything in good working condition your home value should increase naturally. This can be as simple as taking care of things like the paint on the interior and exterior of the home, having the HVAC serviced regularly, protect your home from wood-destroying insects, maintaining the plumbing and the roof.
- Updating your home – You can also grow your equity by making updates to the home that will increase its value. You may not get a 100% or more return on your investment with every update, so be smart about the updates you are doing. If you’re planning on selling in the near future think about what a buyer would want to have in the home as you update.
- Natural Appreciation – Home values traditionally rise on average about 5% a year. Not all homes will go up in value at the same rate. Some neighborhoods and homes appreciate faster than others. This is where you lean on your Realtor’s experience and knowledge to help you make the best purchase decision based on your needs.
