Knowing how to build equity in our home begins with making sure we understand exactly what home equity is. Home equity is most simply described as your stake in the house. It is defined as the difference between the outstanding balance of all liens on the property and the fair market value. For example, let’s say your property is currently worth $200,000 and you only have one mortgage secured against it with an outstanding principal balance of $125,000, you have $75,000 in equity.
There are two ways in which you can effectively impact the equity in our homes: 1. You can increase the market value and 2. You can decrease the amount you owe on it.
Increasing Market Value
Our personal favorite is watching the equity in a home grow through the increasing market price of similar homes in the neighborhood. It’s one of the reasons we buy a house to begin with—homes appreciate over time as a historical trend. We have zero control over the economic cycles of real estate in our region, so let’s focus on two things you can do yourself to increase the market value of your home.
1. Routine Maintenance - Keeping your property in good condition can ensure you protect the home equity you already have. Improving the condition of your property will help you gain even more equity as a result. Ignoring water leaks, bugs, or shingles damaged in a storm can lead to significant damage over time. Water intrusion and termites are both common causes of structural damage if ignored and end up robbing you of home equity if let go. If paint starts to peel on your windowsills, scrape it and paint it. If cracks or deterioration appear in your masonry, have it re-pointed. Protect your investment and equity through proper maintenance!
2. Home Renovations - Updating kitchens and bathrooms to current trends and finishes will usually pay off by increasing property value. Replacing old windows and home systems with newer energy efficient models are also safe bets to gain value. Adding square footage can also increase value especially if adding bedrooms or bathrooms. It’s important to realize that some improvements cost more than the corresponding value your home will gain as a result of the upgrade. In most cases adding a $30,000 pool to the back yard does not equate to selling your home for $30,000 more, for example. In addition, know that you can over-improve the house for the neighborhood which can decrease the return on your renovation investment. If you’re in a neighborhood of $125,000 starter townhomes and you upgrade to custom cabinets, granite countertops, and wide plank reclaimed barn wood floors, you very well may not recoup the cost of those improvements when selling or attempting to tap into home equity. When done thoughtfully, however, home renovations are the best way for you to personally increase the value of your home.
Reducing Home Debt
There is no trick to this, it simply means paying down the balances you owe on any loans secured against the home as collateral. Most of these types of loans are amortized, meaning that a portion of each monthly payment goes toward reducing the principal owed, thus home equity grows naturally as you make each payment. Let’s look at a few creative ways to speed up the growth and build equity faster than making your normal monthly payments.
1. Larger Down Payment - Consider a larger down payment when initially making the purchase so that you have more equity from the start. Just because the mortgage program has a minimum down payment requirement doesn’t mean you can’t put down more.
2. Consider Shorter Terms - Along with a larger down payment, selecting a loan term shorter than 30 years at the time of purchase helps you gain equity in your home more quickly and it starts with your very first payment. Yes, your monthly payment will be higher, but every penny of that increase goes toward paying down your principal balance. Perhaps you’re 9 years into a 30-year term, consider shortening that term to a 15 year through refinancing. Refinancing is not free, and the rate environment is always a factor as well, but with a proper loan comparison this may be an excellent option to build equity faster than your current loan scenario.
3. Pay Additional to Principal - There are lots of ways to get creative with this one. Use your tax refund, bonus, or portion of an inheritance received to pay down principal in large chunks. You can do it more regularly on a monthly basis if you want to. If you can’t do it every month, then do it when you have extra cash, as every little bit helps! As a rule, if you pay an additional 10% of the required principal & interest (P&I) payment every month you can knock a little more than 5 years off a 30-year fixed rate mortgage. So let’s say your required monthly P&I payment is $1,000 on $186,500 mortgage fixed at 5% and amortized over 30 years, but you pay $1,100 every month, not only will you be gaining additional equity with each payment but you’ll save yourself about $65,000 in interest to own that home. Pay that same $1,200 additional at the beginning of each year with your tax refund and you’ll not only gain equity quicker, but you’ll save even more in interest.
The equity in your home can be used to finance home improvements, college, debt consolidation, significant life events and unexpected expenses. At Members 1st, whatever your needs may be, we have you covered. We make it easy to get started, and the best part? No prepayment penalties and no closing costs.
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Already a member? Great! Apply for your home equity loan online or from any of our convenient branch locations.
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