You might be hearing lots of people talking about home equity these days. That’s because many people are losing it! Maybe you’re one of them but don’t really understand what it is you’ve lost. Maybe you are about to buy your first home and are wondering what this home equity thing is all about. No matter where you’re at with the question of equity, we’ve got some answers for you. Home Owner Insurance
What is Home Equity?
Home equity is basically the percentage of your home that you own. If you put 20% down on a new $100,000 home, you would have $20,000 of equity in that home. If for some reason the bank were to foreclose on your home but sold it for the full value of $100,000, they would give you $20,000 of that. Hopefully that will never happen to you, but the illustration helps you see how you can own only a part of your home.
As you make mortgage payments, you build up more and more home equity. At first, though, you build up equity very slowly. On a thirty year $80,000 mortgage at 5%, only about 20% of your monthly payment is going toward the principle of your loan. That means that you’re only building equity at the rate of about $100 a month at first. Eventually, though, amortization means that you put more into equity and less into interest over the life of the loan. This is why near the end of your loan, you’ll be building equity a whole lot more quickly. Home Insurance
Why Be Concerned About Equity?
You should be concerned about equity for a few reasons. For one thing, it’s always better to own more of your home than not. Also, though, as you build up equity, you can help boost your credit and get better borrowing deals later on. For instance, with greater home equity, you can eventually take out a home equity loan, which is a good way to finance major renovations, college educations, and other important items.
How to Build Up Your Equity
Building up home equity can be done in a few different ways. If your home’s value increases, you get an automatic equity boost. We’ll explain how that works in a minute. This means, though, that one way to boost your home’s equity is to make it worth more. If you’re handy with a toolbox, there are hundreds of little ways you can do this, but bathroom and kitchen updates are especially helpful. Just remember here that you don’t want to remodel just to build equity, since you may put more money into the remodel than you get out of the new equity. However this can be another point in the favor of building your dream kitchen!
How do you get more home equity when your home’s value increases?
It’s easier to show you than to tell you. Take that $100,000 starter home we talked about. Let’s say you buy it today with $20,000 down and an $80,000 loan. In five years, you’ll owe about $73,000 on the home, which means you’ll have built up another $7,000 in equity. What happens if you remodel the kitchen and the bathroom slowly over that time period and decide to get your home appraised again? Now let’s say your home is worth $110,000. Well, you still only owe $73,000 on a $110,000 home. If you sold the home today for its appraised value, you’d walk away with $37,000, so that means you have $37,000 in equity. That’s a big jump in five years!
Another option for building up equity is accelerating your mortgage payments. Accelerating them by just $100 a month can make a big difference over time because of amortization. We said that after five years of regular mortgage payments, you’d owe about $73,000 on that $80,000 mortgage. How much would you owe after five years of adding just $100 a month to your payments? Just $66,000! If your home was still worth exactly $100,000, you’d have $34,000 of equity built up. For an extra $6,000 total in payments you got an extra $7,000 in equity, and that difference would continue to increase over the life of your loan.
Deciding whether or not to focus on building up equity is totally a personal decision. Often times people use their equity to take out home equity loans that they can invest in other areas to make more money or just to buy things they need. Either way, make sure you know how you can build equity quickly when you feel like that’s what you need to do. Home Insurance
