Here’s How To Build Equity in Your Home
One good way to look at a monthly amortized mortgage payment is that it’s an installment in building home equity. Defined simply, home equity is the balance you get by subtracting the amount of the mortgage balance from the market value of the house. It’s useful to remember that the value is established through an appraisal process and is not always equal to the sales price whether you’re buying or selling.
Benefits of Gaining Home Equity
- Homeowners can use home equity as a financial cushion during times of fluctuating home values.
- Once the borrower has built up at least 20 percent equity in the home, the lender can cancel mortgage insurance upon request.
- In other instances, borrowers can use their home equity as security on loans or cash lines of credit.
How to Build Home Equity
One of the main ways by which homeowners can build equity is to increase monthly payments on the principal of the mortgage, shortening the time to pay off the loan while increasing their percentage of ownership. The percentage of ownership reflects the amount of equity in the home. Along the same lines, borrowers can arrange to make lump-sum repayments when they have the cash.
The second most-popular option is to refinance the mortgage at either a better rate or shorter term. By crunching the numbers, borrowers can get a handle on how quickly and affordably they can build equity. Before searching for competitive refinancing offers, they can use LendingTree’s Loan Calculator to estimate monthly payments.
At the same time, homeowners may need to build additional equity in order to improve the conditions of their financing through a second mortgage.
Home Equity through Improvements
Not all home repair or improvement projects bring the same rate of return on their investment. Each year, Remodeling Magazine brings out its Cost Vs. Value Report, identifying the average cost for more than 30 popular remodeling projects and how much can be recouped at the time of resale. Each report can be filtered by the homeowner by scale of the project, the cost, the region where the work will be completed, and resale value.
Be sure to consider projects that balance cost with return, especially when based on location. For example, the top project on the West Coast for 2015 was a replacement entry door, costing $1,200 and recouping 123 percent in value. It was not the top project in the Southeast, where a manufactured stone veneer costing $7,131 and recouping 122.6 percent took the top spot in ROI.
Make the Right Improvements
The legal company NOLO warns consumers against undertaking home improvement projects that can harm property values. Currently these include:
- Garage conversions
- Luxury upgrades
- Swimming pools
- Changes that don’t conform with the neighborhood scheme
Consumers considering projects should do their homework as well by city; even within metropolitan areas, projects and values can vary dramatically. Consumers may also want to speak with their financial advisors about the plusses and minuses of using home equity to apply for a home improvement loan to jumpstart increased valuation.