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4 Easy Ways to Build Home Equity

Wendee Silva, CMA,  Sr. Mortgage Advisor

February 16, 2021 — 6 min read

There are countless advantages to owning a home, including the chance to build equity. Home equity is the current market value of your home, minus what you still owe. For example, if your home costs $300,000 and you've steadily paid off your mortgage to the point that your mortgage principal balance is now $250,000, that $50,000 difference is your equity. Homes tend to increase in value over time, even with little action on your part, so in theory your home could have appreciated in value from $250,000 to $300,000, meaning that between your payments and home value, you'll have $100,000 in equity. Though equity can grow organically, you can also take some simple steps to increase your home's worth, thereby building equity.

How to Boost Equity

1. Make Beneficial Renovations

They don't call it "sweat equity" for nothing, but before you whip out the sledgehammers and start painting every wall in sight, do a little homework! Some projects will help you build more equity than others. Here are a few suggestions:

Garage Door Replacement

Though it isn't typically thought of as the most exciting part of a home, garage doors are important for security and curb appeal. That means they're worth renovating. Replacing an outdated garage door typically costs about $1,118, increasing your home's value without breaking the bank.

Siding Replacement

New siding is another effective way to give your home a dramatic makeover. This aesthetic improvement will modernize your home and boost its curb appeal. Though the size of your home and type of siding you choose will impact price, the average cost for this repair is actually less than $1,000.

2. Refinance Toward a Shorter-Term Loan

Have a 30-year loan? Consider refinancing to shorten your term to 10 or 15 years. If your new mortgage covers the same amount as your old mortgage, also known as a straight refinance, you'll likely end up with lower interest payments. This means more of your payment will go toward your principal rather than interest, translating to an accelerated timeline for building equity. If you can lower your monthly payment, that may also give you extra funds to use to pay down your principal.

3. Pay More than the Monthly Requirement

Not ready for major renovations or a refinance? You can still build equity. When possible, add a little extra to your monthly mortgage payment--just make sure these additional funds are applied toward your principal balance instead of getting rolled over to your next monthly payment. Paying down your principal with extra funds is an especially great option if you've gotten a raise, bonus or other funds you don't need to use for essentials.

4. Engage with the Community and Stay on Top of Your Property Values

Not everyone who buys a home plans on staying there for the long term. To build equity, though, you should plan on staying in your home for at least 5 years so it can appreciate in value. While you're staying put, remember that your home's value isn't just based on the property itself. The surrounding community also has a major influence on property value.

As similar homes in your neighborhood sell, they will set a new fair market value for the area. You can track this to see how much your own property is appreciating. If you aren't seeing upward movement in those numbers, become an advocate for your community. Do some research and support initiatives that make your neighborhood an appealing place to live. Let your city or town council know if you and your neighbors would benefit from a new dog park, community center or library. This way, you can actively make your community more liveable, and you'll reap the benefits when it's time to sell.

Importance of Building Equity

So why is equity such a big deal? Most assets that you purchase with a loan, such as a car, will lose value as you pay them off. Property is the opposite. Equity is the next best thing to having money in the bank. Should the need arise, you can borrow against this equity to pay for home improvements or fund a reverse-mortgage to pay for retirement. As you build equity through the lifetime of your mortgage, you can also take steps to create greater long-term financial stability for your family.

Refinancing and Equity

There are many different ways to access and benefit from equity. For example, when you build sufficient equity you can refinance your mortgage, permitting you to cash in or get a lower interest rate on your mortgage. But your options don't end there.

If you want access to cash that you can use in case of emergencies or one-time planned expenses, you can use your equity to open a home equity line of credit (HELOC). A HELOC is secured against the value of your home equity and functions as a revolving source of funds, like a credit card. It's convenient like a credit card, too--you can borrow against this line of credit at any time.

If you have an FHA-, VA- or USDA-backed loan, you can take advantage of Streamline Refinance programs to get a lower rate more quickly, often without an appraisal.

Cash-in and cash-out refinances are other options to consider. A cash-out refinance pays you part of your home's equity, limited to about 80-90% to spend on home improvements or debt consolidation. A cash-in refinance is a solution if you owe more than your property is worth, as you pay down enough on your mortgage to refinance.

Equity can also be useful if you find yourself needing to move in a hurry. With a cross-collateral loan, you can use the equity in your existing home as a downpayment on a new property. In a competitive real estate market, cross-collateral loans are a helpful tool to help get you into your dream house and either sell or rent out your old home.

Building home equity is a great way to build long-term financial success. Are you ready to invest in your future? We can help. Get in touch with your local branch today!

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