How Can I Increase My Home’s Equity?
Can My Real Estate Lose Equity?
What Should I Do With My Equity?
Whether you are a seasoned real estate investor or just a newbie looking to learn more, understanding equity is a crucial step for anyone looking to start their journey. In real estate, equity is the difference between what your property is worth and what you owe against it. For example, if you purchase a house for $100,000 and you initially put 20% down, your equity in the property is $20,000. Another way to look at it is by subtracting any liens or outstanding mortgage payments from your property’s market value. Say your house is worth $250,000 but you still owe $50,000 to the bank, your equity in your home would be $200,000.
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How Can I Increase My Home’s Equity?
There are three main ways to increase the amount of equity you have in your home.
Increase your down payment.
When you first buy your home, the more money you initially put down, the less you will have to pay in the future. This may seem obvious, but it makes all the difference if you find yourself in a sticky situation. Especially in times like today, as the economy becomes more and more dependent on credit.
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Keeping up with your monthly payments.
Doing this decreases your debt and will get you in a position to own your home free and clear. By consistently paying your mortgage on time you will increase your equity the old fashioned way.
Improving your home’s value.
Finding value add opportunities is key when looking to increase your equity. For example, if my home has a kitchen in need of updating, and I can repair it for $10,000, doing so will make my home more valuable to a prospective investor. Updating my kitchen could potentially increase the value of my home by $15,000. This would result in an increase of $5,000 in my home equity. While small cosmetic repairs can do wonders to increase the value of your home, an appraisal is necessary to confirm the worth of any repairs.
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Can My Real Estate Lose Equity?
As there are many ways you can increase your equity in a home, there are also ways you can lose equity. The most typical way this can happen is by refinancing your mortgage. By refinancing, your home is reevaluated and you can extract some equity from the property in the form of cash. This can be used to pay off debts, send your kids to college, or even buy another property. But, this also means your monthly mortgage payments may change and you may have to pay them longer than your initial mortgage entailed.
Another way you can lose equity is by not taking care of your property. If you bought a $100,000 house, but let it sit vacant for a number of years, the value of the house will decrease. Not taking care of your investments will decrease the market value, cutting into your equity. Some great improvements we recommend are repainting the interior, updating your light fixtures, and doing some landscaping to increase the overall curb appeal.
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What Should I Do With My Equity?
Deciding what to do with the equity in your home can be a difficult decision. If you are strapped for cash, a refinance might be a good idea. If you have a favorable interest rate on your existing mortgage, it might be best to continue to make your payments on time and build your equity for the future.
There are also strategies that you can utilize to leverage the equity in your home to invest in more real estate. This can be done when you owe significantly less than the house is worth. The two most popular equity products are the home equity loan and the home equity line of credit, also known as a HELOC.
HELOC vs. Home Equity Loan
So what’s the difference between a home equity loan and a HELOC? Well, the biggest difference is that a home equity loan is a mortgage product that disburses all of the funds at the beginning of the loan, with an exact term length and equal payments. On the other hand, the funds you receive from a HELOC are not necessarily disbursed all at once. Rather, it allows you to borrow and repay the loan with flexibility, similar to a credit card.
To learn more about these products, call your local bank or credit union and ask if they do “second mortgages”. Working with an experienced professional is crucial when using this type of financing, so that you understand the risks you are taking.
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All in all, the safest way to protect the equity in your home is by taking care of your property and paying your interest payments on time. While everyone’s situation is different, by doing this you can ensure your investment will always continue to appreciate!
DISCLAIMER: The information provided on this website does not, and is not intended to, constitute legal or investment advice; instead, all information, content, and materials available on this site are for general informational purposes only.