Home equity is one of the most important topics for homeowners. Everyone talks about how owning a home is a great financial move and something that most all of us should do. And that is pretty true. However, you need to understand WHY owning a home is usually a good investment in the long term. And that is because of home equity. So how do you build home equity? Let’s go over it.
What is Home Equity?
Before we get into how you build home equity, we must first understand what home equity is.
At its core, home equity is the difference between what the home is worth and what you owe on it.
For example, if you have a home that is worth $300,000 and you owe $200,000 on it, you have $100,000 in equity. That means that you effectively “own” $100,000 of that home.
For a deeper dive into home equity, check out my other article on it.
Paying Down Your Mortgage
The first way that you can build equity in your home is simply by paying down the mortgage.
Each month that you make your mortgage payment, you pay some to interest, some to principal, some to taxes, and some to insurance.
You will ALWAYS have taxes and insurance (even if your house is paid off).
But each month that you make your mortgage payment, you will pay a little less toward interest and a little more toward principal.
The amount that you pay toward interest each month is the amount of equity that you build by paying down your mortgage.
So if you had $400 of your last mortgage payment go toward the principal reduction of your loan, that means that you now have $400 more in equity in your home.
Making Improvements to Your Home
The second way that you build equity in your home is by making improvements to it.
This can come in an infinite amount of ways but here are a few common examples:
- Putting on an addition
- Upgrading flooring
- Landscaping
- Repaving the driveway
- Paint and trim work
- Getting new appliances
- Etc.
All of these improvements will most likely add value to your home. However, you need to be careful not to overbuild the neighborhood.
If you put $200,000 into improvements into your house, you may not get that money back if you were to sell it if houses in your neighborhood are not selling for that much.
Here is an article that I wrote on overbuilding the neighborhood that might be helpful to you.
Housing Values in Your Area Going Up
The last way that you can build equity in your home is by the housing prices in your area going up.
There is likely not much you can do about the housing prices in your town, neighborhood, street, etc. If the prices go up, it is likely because there is a shortage of houses for sale, there is a surplus of buyers in the market, your area is desirable for others to move into, etc.
But when the prices of the homes in your area go up, so will yours. That means that you have built home equity.
For example, if you bought a house for $250,000 and you owe $200,000 on it, you have $50,000 in equity.
But if in a year the houses in your area have gone up in value and are now worth $300,000 and you still owe $200,000 then you have $100,000 in equity now! Congrats!
Final Thoughts
One of the best wealth building tools that you have at your disposal is the home equity that you build up over time.
This is one of the ways that you can build wealth in the background of your financial life.
You can do this!
Until next time!
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