Equity, which can be defined as the difference between your loan balance and the fair market value of your home, is a huge perk of being a homebuyer. You can gain it simply by making your monthly payments; and you can also borrow from it via a cash-out refinance to help pay for major life expenses. How much equity you gain (and how quickly you gain it) from homeownership, however, is dependent on several factors.
You can gain equity in your home before the movers even arrive with your belongings. By making a down payment on your home purchase, you immediately acquire equity by lowering your loan-to-value ratio. If the fair market value and purchase price of your home is $180,000 and you make a 20% down payment, you have $36,000 of gained equity.
Home values can rise or decline in response to market aspects, such as the economy, mortgage rates, supply and demand, etc. In a housing market with increasing home values, you will gain equity by simply sitting back and waiting – on top of keeping your home maintained and making your monthly mortgage payment.
Increasing Home Value
Increasing your home’s value with home improvements will also increase your home equity, but not all home improvement projects are created equal or guaranteed to get you a return on your investment. The following projects typically increase home value, and therefore, increase equity:
- Kitchen and bath remodels
- Creating a wide, open floor plan
- Adding space
- Updating the home (removing popcorn ceilings, wallpaper, outdated bathroom fixtures, etc.)
Routine Home Maintenance
While replacing gutters, tuning up the A/C unit, and adding extra insulation to the attic may not be on the top of most homeowners’ lists for home projects, they are things that will increase value when it comes to selling their home. Keeping up-to-date on home maintenance not only allows a home to function properly but increases value and equity.
Speeding up Equity
Some homebuyers choose to increase their equity with pre-payment strategies on their mortgage or shortening their mortgage terms. By adding an additional amount to a monthly principal payments or making an additional yearly lump sum payments, homeowners gain thousands of dollars in equity.
Equity can also be gained at a faster pace by shortening your loan term. Though a 15-year fixed rate mortgage will require a larger monthly payment, shorter loan terms typically come with lower interest rates and allow borrowers to deflect mortgage interest at a faster pace.
Is tapping into your home equity one of your mortgage goals? Check out our Refinancing Guide for information on refinance types, the cost of refinancing, and timing your refinance.