Home Equity | 5 Steps To Enhance Your Home

Home Equity… Everyone desires it, but what is it and how can you obtain it?

After removing any loans against the asset, equity represents the degree of ownership an individual or organization has in the asset. When someone says they own equity in a corporation, they are referring to the assets that remain after all debts have been paid.

For example, if your company sold $500,000 in merchandise this year but had $400,000 in rent, operational expenditures, and a business loan payment for the year, you have $100,000 in equity in your company. As the value of your assets and debts fluctuates, so does your equity.

The same principle applies to home equity. When you take out a mortgage to buy a house, your home serves as security for the loan, so the outstanding mortgage principal must be subtracted from the home’s worth to calculate your home equity.

When you buy a house, you almost always make a down payment. Your initial home equity is the amount you put down as a down payment. When you put down a 20% down payment on a $200,000 property, you’ll have $40,000 in equity when you close.

Your equity rises over time as you continue to pay down your mortgage principal. Because you are paying down your mortgage, the longer you own your house, the more equity you acquire.

However, any obligations secured by your house’s worth, such as a second mortgage or a home equity line of credit (HELOC), reduce your home equity.

How is home equity affected by the real estate market?

Your equity is affected by the changing real estate market. Your notional equity improves if you spent $200,000 for your property and the properties in your neighborhood start selling in the $400,000 level two years later.

(Theoretical because you don’t realize how much equity you have in your home until you sell it and pay off all of your debts.) If the market falls, you may lose money, but if you wait long enough, it will recover.

If you make modifications to your property that boost its value, your equity grows as well. Let’s imagine you add a pool and all new appliances to your home. You have boosted the home’s worth.

The value you obtain when you resell your home determines your equity, not the amount you spent on improvements. This is a crucial issue to remember when considering home upgrades before putting your house on the market, and one that is frequently overlooked.

Let’s say Joe spends $50,000 on home improvements. He might tell his neighbor, “I have $50,000 in my house,” but when it comes time to sell, the current market will determine how much he gets. Joe’s $50,000 investment will yield $40,000 in home equity if he sells for $40,000 more than he bought for it. 

Here are 5 Steps to Enhance Your Home Equity

You can enhance your home equity by doing the following things:

1) Put a hefty down payment on your home when you buy it. The more money you put down, the more equity you’ll have at the start.

2) Make greater or additional principal payments on your mortgage. Making extra payments when you can, or merely adding to the principal component of your monthly payments, helps chip away at your outstanding debt.

3) When doing house modifications, use caution. Not all improvements result in increased equity. Some upgrades may represent personal preferences rather than adding resale value.

{Related – Home Equity – Learn the Secrets of Wealth Effect in Maryland}

A new HVAC system, new appliances, or a new roof are usually more dependable investments than a front-yard fountain or surround sound speakers throughout the house.

4) Only borrow against your home equity if absolutely necessary. Home equity is frequently a homeowner’s most valuable asset, and while it can help you save for retirement, it can also come in handy if life throws you a curveball and you need to borrow against it for an unexpected expense.

Make sure you don’t use your equity for frivolous purposes, so it’ll be there when you need it.

5) Sell when the market is trending in your favor. If you want to use your home equity to help finance your next house, pay for your children’s school, or supplement your retirement funds, sell when there is a shortage of inventory in your area.

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