Simply put, home equity is the share of the homeowner in the home’s value. It can increase with time and in certain circumstances decrease too.
To define it better, we can say that home equity is that portion of the property’s value that you actually “own.” When we buy a home, we normally lend some money to close the deal. And while we are called the homeowners, we haven’t actually paid for all of it, and the lender’s interest in the property remains until we have fully paid back his share in the property’s value.
To elaborate it further, consider this example: You buy a home for $100,000, and you pay 20% of the home’s value as down payment and borrow the remaining amount from a lender (financial institutions in most cases). In this case, your home equity interest will be equal to $20,000. While you will be considered the homeowner, your true ownership will be 20% of the property value, i.e. $20,000.
How Can You Increase Equity?
The more equity you have in a home, the better it is for you. In an ideal scenario, there are two ways to build on and increase home equity.
- Increase in Home value
- Decrease in Amount of Debt
The way you choose to build upon equity depends on your goals, financial situation, and a little bit of luck.
Increase in Home value
If the home value increases, it is a given that your equity will automatically increase. So, what are the factors that might lead to an increase in home value?
Price Hike in the Market: If luck is on your side, property value in your neighborhood might rise without you having to do anything special. If you have made a smart decision in the purchase process, you might get lucky more often than not.
Home Remodeling and Improvement: If you invest money in your home to make it better for potential buyers, it is bound to give you good returns. Small home improvements like a paint job, shingle replacement, etc. can help you in a great home appraisal. My Realty Value provides home appraisal services, so you may contact them to make sure you are not overpricing or under-pricing your home.
Decrease in Amount of Debt
Monthly Payments: Paying off your debt through basic monthly amortization is the most basic way to reduce your debt. It is more of a legal requirement, so you have to make sure you make your payments regularly.
Pay Extra: If your cash flows are good and you can afford it, start paying off your debt quicker than normal. Increase your monthly payment amount by discussing it with your mortgage provider to make sure you are doing it right.
Opt for Short-term Loans: If your purpose is to build equity quickly, you should opt for shorter-term loans. A 15-year plan is better than a 30-year plan as you will be paying larger amounts allowing you to pay off the debt quickly.
Your home equity can increase quickly if you create a good mix of both these ways to fit your needs the best. Relying solely on either one of them is a mistake, so, you have to work pretty smartly to get the most out of both.