Equity is the money you make from owning your home. You can calculate your equity by subtracting the amount of principal you owe on your mortgage from your home’s value. Equity increases as you pay off your mortgage and as your home increases in value. It decreases should your home lose value.
Getting your hands on your equity is not easy. You can get cash from your equity in one of three ways: refinancing your existing mortgage, taking out a second mortgage, or selling your home. You can borrow against your equity with a home equity line of credit, but a HELOC is a loan that you must repay.
Following the housing crash in 2006-2007, home values plummeted, especially in markets like Las Vegas, San Francisco and Miami where they had appreciated quickly during the housing boom. US households lost over $7 trillion in home equity before prices recovered. Some 22 percent of all homeowners went “underwater;” they owed more on their homes than they were worth. Millions of homeowners lost their homes during the Great Recession when they could not meet their mortgage payments and owners had no equity in their homes.
Now that the recovery is underway and prices are rising, equity is booming. During 2017, the average homeowner gained $15,000 in equity. By the end of the year, less than 5 percent of all homeowners still had negative equity.
As long as home prices are rising in your market, you are probably gaining equity. You can gain equity even faster by taking steps to increase the value of your property or decrease the amount that you owe on your mortgage. Here are six ways you can speed up the growth of your equity.
Three Ways to Reduce Your Mortgage Principal:
1. Make a Larger Down Payment
You don’t need to put 20 percent down to get a mortgage today. Last year, 61 percent of first-time buyers put down less than 6 percent. Lower down payment options, like FHA and down payment assistance programs, help families to become homeowners if they don’t have the cash available for a 20 percent down payment. With a lower down payment, however, homebuyers must repay a higher principal, which results in higher monthly payments, more interest, and less equity. Buyers who can afford a 20 percent down payment build equity faster. They also avoid the requirement to take out mortgage insurance.
2. Take Out a Shorter Mortgage
Most buyers today take out 30-year mortgages because monthly payments are lower than mortgages with a shorter term. However, they pay more in interest over the 30-year lifetime of their mortgage, so over its lifetime, the cost of a 30-year mortgage is higher than a 15-year mortgage.
3. Pre-Pay Your Mortgage
After several years in your home, you or your spouse may be making more money each month. One way to put that extra income to good use is to pay more than your required mortgage payment each month. The amount you pay that exceeds your monthly mortgage payment goes towards reducing your mortgage principal. By pre-paying your mortgage, you are increasing your investment in your home by building equity. You also reduce the time it will take to become mortgage-free and improve your credit by reducing your debt.
Three Ways to Increase Your Home’s Value
1. Keep Your Home Clean, De-cluttered and in Good Repair
Some owners wait until they are selling their homes to get it ready for sale. Keeping up with repairs on an ongoing basis is a better idea. Well-maintained HVAC, electrical and plumbing systems will last longer. You won’t lose things or forget to do something because you put off repairs and de-cluttering until the last minute. It’s much more pleasant to live in a home that is clean and spacious than one filled with clutter. When you are ready to sell, getting your house clean and staged won’t be a big deal.
2. Make Home Improvements to Increase Your Home’s Value
It’s a fact that most remodeling projects don’t increase the value of your home enough to pay for themselves on a dollar-for-dollar basis. In other words, when you sell your home, you should not expect to recoup every dollar you spent on most improvement projects. However, all improvements increase your value somewhat, and some will be necessary to sell your home. Since you are going to have to make these improvements anyway, it’s a good idea to make improvements as you go. Remodeling magazine conducts an excellent annual cost vs. value survey of small, medium and major projects.
3. Get an Appraisal
Determining a house’s value is far from an exact science. Many factors, including your home’s age, location, size, condition, and style, determine the value of your home. Moreover, home values are constantly changing to reflect local real estate markets. Home appraisers value your home on the basis of recent sales of nearby comparable homes. It makes sense for you to have your home appraised to get an accurate and fresh valuation of your property after you have completed some projects. With a current appraisal, you can use it to calculate your home’s equity accurately. If you sell in a few years, a relatively recent appraisal will come in handy when you price your home for sale.
For many couples, equity is a nest egg that is the foundation of their personal wealth and financial security. The housing crash shook many homeowners’ faith in homeownership. Now that conditions are improving and equity is building in their homes, owners are taking a very conservative approach towards their equity by refinancing to convert some of their equity into cash.
Homeowners who lived through the housing crash ten years ago learned the hard way that every investment, including homeownership, has its risks. Individual owners can’t do much about trends in real estate markets, but prudent owners who take good care of their homes and protect their equity are more likely to come out ahead.