Buying a home is more than finding a permanent place to live. It’s also a financial investment. As with all investments, the return on a home investment depends on how much you put into it. In this article, we’ll discuss how to build home equity and when to use it. First, let’s look at what home equity is.
What Is Home Equity?
Home equity is the difference between the fair market value of your home and the remaining amount you owe on the mortgage. In other words, if you paid $200,000 for your home, and the current appraised value is still $200,000, but you have paid the mortgage down to $100,000, your home equity is $100,000. An appraisal is necessary when figuring out home equity, although you can usually get a decent estimate when looking at what you paid and how much you now owe.
It’s helpful to consider some useful ways to build equity so that it’s there when you need it. Here are three ways to build home equity:
- Down Payment: Begin with the largest down payment you can to reduce the amount you owe immediately.
- Value: Increase your property’s value with wise home improvements, such as a kitchen remodel or an improved master bath. These two areas matter to buyers and increase a home’s value.
- Pay Off the Mortgage: Throw extra money at your mortgage whenever you can. Consider bi-monthly mortgage payments rather than once a month to increase equity.
Using the Equity
If your credit allows and with the help of a lender, you can use your home equity for financial help. The home equity loan often rolls back into the mortgage for payback and comes in the form of either a line of credit or lump sum. There certainly is no requirement to take any equity out of your home. However, it’s there if you need it. The three most common reasons homeowners use the equity in their home are as follows:
- Investment: As equity grows, it makes a great tool for investing in the future. Homeowners choose to invest for the long-term, short-term, or passive or extra income. Investing in more real estate using your current real estate equity is an excellent way to begin growing an investment portfolio. Just be sure to understand the best time to dabble in real estate investment. Don’t assume that because the market is hot, so is real estate investment.
- Home Improvement: Dipping into your home’s equity is the perfect way to take out a loan for some home improvements. The money is there to cover expenses, and at the same time, the home’s value increases with improvements.
- Pay Off Debt: Paying off debt is always a good decision. And although you’ll still need to pay back a home equity loan, it’s a great option for paying off things like credit card debt so that you have only one payment, which is your mortgage.
Hopefully, we’ve cleared up any misconceptions about how to build home equity and when to use it. Work hard to pay down a mortgage as quickly as possible, then enjoy the option of using the equity you’ve built up from your investment.