4 Ways to Increase Equity in Your Home

Increase Equity

Every real property owner has some amount of equity tied up in their asset. Even if you are underwater, negative equity is still equity. Your mortgage company required a property appraisal prior to purchase to demonstrate that the asset’s value would support the amount of your mortgage. This appraised value may or may not be equal to the market price (the price actually paid to the seller for the property).

Your equity at the time of purchase is the market price less the initial principal amount of your mortgage. A $300,000 home purchased with an 20% down payment (80% mortgage) leaves the homeowner with $60,000 in equity and a $240,000 mortgage.

Equity is not some concrete number that you can pinpoint as going up or down on any given day, the market value of your property is difficult to determine at any given time. What you can do is estimate your equity against a specific reference such as the original market price, the original appraised value, a new appraised value or simply what your gut tells you your home is worth today. The accuracy of your equity in the property varies depending on the accuracy of your reference. You can’t determine true market value without actually exposing your property to the ENTIRE market and then selling it.

As with buying and selling securities, you don’t truly realize a gain or loss in equity unless you sell the asset. Here are four ways to increase your equity in that asset.

1 – Appreciation:

Simply living in and maintaining your home can increase your equity, the value of your property traditionally increases with time unless you find yourself having to sell in a down market.

2 – Improvements:

Have you opened your floor plan, finished your basement, updated the kitchen or bathrooms? Even small renovations like replacing your front door can increase the value of your home. Just keep in mind that you normally do not recuperate the total cost of your renovations. Cost vs Value 2017

3 – Buy below market value:

Is that home priced too low for the area? Listings can become stigmatized after extraordinary long marketing periods resulting from overpricing or something as simple as bad pictures and paint. Have you ever looked at a listing and wondered why it hasn’t sold, what is wrong with it? It may just need the carpets pulled up, some fresh paint and a properly timed price reduction. Paying “below” market price may provide immediate additional equity.

4 – Principal reduction:

Anyone with some money left over at the end of the month can speed the rate at which they increase equity.

  • 15-Year mortgage – The shorter amortization period of a 15-year mortgage means you are paying off the principal balance of your loan and increasing your equity much faster than you would with a 30-year mortgage. You also end up paying significantly less in interest over the life of the loan. The drawback is that the increased monthly payment may be more than your budget can support and the payment is not optional.
  • Extra Payment – Making extra payments can be helpful over time because you are reducing the principal balance ahead of schedule. Consider the $240,000 loan mentioned earlier. The monthly principal and interest payment for this loan is $1,180.66 (This does not include taxes and insurance). Making one additional $1,180.66 principal payment each year would shorten your repayment period to 25.75 years and will save you roughly $30,000 in interest payments over the life of the loan. After using this method for 10 years, your loan balance would be nearly $15,000 less than it would have been without the extra payment and you would have saved over $2,846 in interest payments. That means that $11,806.60 in prepayments (10 years x $1180.66) saved you $17,846 over 10 years ($15,000 lower loan balance + $2,846 interest payment savings).
  • Extra Principal – Making an additional payment against your principal balance each month has a similar impact when compared with making an extra payment each year. Paying an additional $100 per month with the $240,000 loan example has almost the same effect as making one extra yearly payment (in this scenario, $100 x 12 = 1,200 ~ 1,180). Paying an additional $200 per month allows you to pay off your loan after 22.6 years with a savings of over $51,000 in interest payments. Paying an additional $300 per month effectively reduces this 30-year loan example to just about 20 years with over $67,000 in interest savings. One of the best benefits of the extra principal strategy is that it is optional. Simply signing up for a 20-year mortgage is great, but the payment amount is not up to you, you don’t have the option to make a lower payment when money is tight like you can with an extra principal approach.

Buying a home is an investment, these four methods to increase your equity are all part of what makes the home ownership investment a good investment. Are you currently making a monthly mortgage payment and building your equity or are you paying rent and building your landlord’s equity?

Ready to talk equity or housing? Contact me today if you are looking for a different kind of agent.

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