Your home is probably the most valuable asset you will ever have. Whether you own your home or have an investment property, real estate is typically a good investment because property values historically increase over time. From the moment you buy a house, you are building equity in a home, equity that can be converted into cash.
If you are not familiar with the term home equity, it is the difference between the value of your home and what you owe on that home. Home equity increases as the property value increases and the amount you owe on your mortgage decreases.
Having home equity gives you an asset that you can use when you need it. If you have a medical emergency or need to cover a large expense at the last minute, you can convert that equity into cash. You may also want to use your home equity for improvements to increase the value of your home, or you may want to include it as part of your retirement strategy.
Building equity is one of the biggest advantages you have as a homeowner. Doing this allows your home to become a valuable asset.
Home equity is the current market value of your home, minus what you owe. Any gain comes from:
Building home equity is a bit like investing in a long-term instrument, like bonds. Your money is, for the most part, locked up and not spendable.
There are some ways to tap into this equity, but generally, wealth is created over the years as your share of "free and clear" ownership of the house increases. Building equity is a long financial process, though more immediate market conditions can lead to periods of steep gains or losses.
Making a large down payment on your house will allow you to build equity quickly. The larger amount you put down, the bigger your equity is to start with.
Deciding how much down payment to make when buying a home can be a challenge, and it can make a big difference in how much your home costs you. The amount of money you pay upfront determines how much your mortgage payment is.
A bigger down payment means a smaller mortgage amount, which means lower monthly payments. This means more money in your monthly budget for the other facets of your life and, again, fewer dollars of interest paid overtime. With more of the costs covered at the beginning, you may be more likely to pay the entire mortgage off in less time. With lower monthly payments, maybe you can even make extra principal prepayments. Paying off a mortgage early often makes financial sense and can help you be better prepared for retirement.
As too many homeowners found out the hard way during the last recession, home values can fall the same way they can rise. By having a greater percentage of your home paid off before you even move in, you minimize the likelihood that a price decline will put you into a negative equity situation.
There are, of course, some reasons not to make a larger down payment — you can get a greater return by investing that money elsewhere than you will pay in mortgage insurance and interest, or you have other high-interest debt. It is important to understand, though, that if you can afford a larger payment or are willing to wait to purchase a home so you can save for one, you may end up paying less for your mortgage overall, paying your mortgage off faster and getting better interest rates and terms in the bargain.
While most people will choose a 30-year loan over a 15-year loan, always check to see if your budget is enough for a shorter mortgage. Doing this means you'll be paying less interest while building equity faster.
If you've got the means and want to extinguish your home loan earlier, think beyond the 30-year fixed. It's possible to refinance into a shorter-term mortgage with a lower mortgage rate, such as a 15-year fixed, which will increase the size of your payments but build equity at a much higher rate than a traditional 30-year mortgage.
You might also be able to pick something in between, like a 20- or 25-year fixed, or even something that matches your original term, like a 22-year loan term. This will keep you on track or even ahead of schedule and also help you avoid resetting the clock.
Once you pay off your mortgage, you'll have 100% equity in your home, as long as you don't have any other liens on the house. By refinancing to a shorter loan term, you'll pay the loan off earlier. You'll also save thousands of dollars on the interest you would've paid during the longer term. Keep in mind that that when you shorten your loan term, you increase your monthly payments because you have less time to pay the loan balance. You may also have to pay closing costs for your new loan, so make sure you're able to afford to refinance to a shorter-term before you apply.
You can increase the amount of equity you make by putting in extra mortgage payments or by paying more than you need to every month.
Even if you can't or don't want to refinance to a shorter loan term, you can still work toward paying your mortgage off early. However, beware of any prepayment penalties attached to a mortgage. These are fees that the lender charges you for paying off your mortgage earlier than its term.
The more you pay down, the more equity you have. And the faster you can pay it down, the faster you'll have that equity. By making extra payments to your mortgage, you can also save money on total interest paid over the life of the loan. The more you pay down, the less money there is for the lender to charge interest on.
We know that making extra payments can help you pay your mortgage off faster and build equity. Switching to biweekly mortgage payments can add one extra mortgage payment toward your mortgage each year.
Instead of paying your mortgage once per month, you pay half of the monthly payment every two weeks. You end up paying an extra mortgage payment because you end up making 26 payments. That's because there are 52 weeks in a year, and you're paying every other week. Since those payments are half-payments, you'll make 13 full mortgage payments in a year. When you make one mortgage payment per month, you make 12 payments in a year since there are 12 months. By making an extra mortgage payment each year, you could pay your mortgage off 6 – 8 years earlier.
This might be a great idea when you get a holiday bonus from work or whenever you get tax returns. If you're lucky enough to inherit some money, put it towards your principal. For those who don't want the commitment that comes with a 15-year mortgage or increasing the size of your payment, look for cash that dribbles in here and there. Holiday and birthday gift cards? Convert them to cash and add them to your mortgage. Dedicate overtime pay, bonuses, or every other bonus to building equity. Cash gifts?
Consider even selling unwanted items in the house that has high-perceived value, such as designer clothes, home equipment you're no longer using, or even the bike that sits in your garage. Every bit counts and can make a difference in paying the mortgage off.
If you are fortunate enough to inherit money, use at least part of it to pay down the mortgage. Your mortgage servicer can tell you how to add dribs and drabs or a big windfall to your equity. As before, make certain the money goes toward the principal, not interest.
The right home improvement projects can significantly increase the value of your home. As such, your home will also have an increase in equity. Some remodeling and improvement projects boost a home's equity, but not all do. Smaller projects like adding attic insulation and replacing a patio door or front entry door help to increase equity, especially if you pay with cash instead of via a loan. Here are the best home improvements to add value to your San Diego home:
Ask any homebuyer what they look for in a home, and you'll be hard-pressed to find one who doesn't place value on curb appeal. After all, you can have the best interior in the world, but without attractive landscaping and front exterior, few buyers (if any) will be charmed. Even a simple, well-maintained lawn can go a long way in building equity in your home. However, Money Crashers warns that going overboard with landscaping (i.e., adding fountains, expensive plants, etc.) will not necessarily add value to a home. Instead, the website encourages homeowners to "wow potential buyers with a well-kept lawn, and some well-placed shrubbery or small trees." These front yard house changes tend to "recoup a decent percentage," according to Money Crashers.
Tired of living in a home with old, drafty windows? Fortunately, getting a window replacement in San Diego can help. Simply replace your old windows with new, energy-efficient ones, and you're sure to increase your home's value (and decrease those monthly energy bills). While new windows aren't cheap, they do end up saving you money in the long run. They also make it easier and faster to heat and cool your home throughout the year, which means you can kiss those high utility bills goodbye. In fact, according to money, "replacing old windows with newer, energy-efficient ones can save you anywhere from $25 to $450 a year in heating and cooling costs."
Everyone (especially a homebuyer) loves having an outdoor deck for lounging, eating, and grilling. According to Remodeling's 2019 Cost vs. Value Report, adding a wood deck addition to your home yields a return of more than 75 percent. The report notes that this return is for a 16×20 foot deck addition using pressure-treated joists. Also, according to Money Crashers, the cost of adding a deck varies widely depending on materials and size; however, most decks cost anywhere from $1,200 to $10,000 or more. Though pricey, these decks will ensure you have plenty of outdoor space to enjoy while also building equity in your home.
Having updated or new bathrooms in your home will go a long way in attracting potential buyers down the road. Since it's a room that you and guests use on a daily basis, many consider bathroom remodels to be well worth the money, time, and effort. According to Remodeling's 2019 Cost vs. Value Report, a mid-range bathroom will cost you around $20,000. When homeowners sell their homes, they should be able to recoup around 67 percent of their investment. In many cases, you can remodel a bathroom for under $20,000 when you choose affordable and reasonable finishes from Home Depot and Lowe's.
Kitchen remodels can either be extremely expensive or fairly affordable, depending on the finishes and appliances chosen. While it's certainly never cheap to redo a kitchen, it doesn't have to break the bank either. Those that choose high-end, luxury finishes, such as marble countertops, custom cabinets, and designer backsplashes, could end up paying upwards of $100,000 or more. However, those that choose less luxurious finishes can easily redo a kitchen for $40,000 or less. For many homebuyers, having a spacious, practical, and updated kitchen is at the top of their list of needs, making this improvement a must.
A well-chosen home improvement can build equity in your home as well as make your home more comfortable to live in. Equity is built by increasing the difference between the market value of your home and the money you owe on it. Home improvements can significantly increase the value of your home, and one of the best ways to do it is to replace your drafty windows with new energy-efficient ones. At US Window & Door, we offer the best selection of stylish and functional energy-efficient windows to keep the cold air in your home and aid in keeping energy bills low. Schedule a free in-home estimate* today and learn how we can boost your home equity faster!
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