A Beginner’s Guide to Home Equity
Simply put, home equity is the interest a homeowner holds in their property based on the current market value minus what they owe on the home. A basic formula for home equity might look something like this:
Home Value – Owed Amount = Home Equity
Home equity should always be considered as an asset that can be used in the future, but also never taken for granted. Home equity doesn’t rise overnight either and should be treated as a long-term asset that slowly appreciates. However, home equity can also decrease. There are a couple of ways you can increase and decrease your home equity.
Ways to Increase Your Home Equity
- A larger down payment: The general standard for down payments on a home is 20% of the value, but what if you put down more? Even a one or two percent difference can expand your home equity quicker.
- Making loan payments: It might sound simple, but making continual payments on your home loan lien can bring up your home equity. As your owed amount decreases, your home equity increases. If you want to increase home equity at a greater rate, you can explore making extra payments or having a shorter-term to your loan to quickly gain home equity.
- Home improvement: Whether it’s a big home improvement project like remodeling a kitchen, or a small project like replacing a window, home improvement projects can have a positive impact on home equity.
- Give it time: Home equity can be years in the making and a key piece is the homeowner’s patience. Home values have gradually increased on average across the United States. This appreciation can be a great boost to your home value. For example, let’s say your home is valued at $350,000 when it’s first purchased and you owe a loan for $250,000 of it. If your home doubled in value to $700,000, your home equity would be over $450,000 and you wouldn’t owe any of that extra earned value to your loan.
Things that Decrease Your Home Equity
- Low home condition: Repairs that a homeowner continues to put off could be damaging in the long run by hurting the home equity. A well-maintained home with continual updates will be rewarded while a run-down home’s equity will decrease.
- Decline in neighborhood conditions: Is the local school system unappealing? Have crime rates gone up? The circumstances of the surrounding neighborhood and community can impact the home equity.
- Market reactions: As seen with market downturns like 2008, if the supply of homes exceeds the demand, the home value will decrease. Therefore, decreasing the home equity.
- Shifts in a home loan: By using home equity for the asset it is to take out a second mortgage or even buy a future home, you automatically decrease the home equity.
Find the Right Loan with Chris Doering Mortgage
Make sure to handle home equity with care. It is never advisable to use home equity to fund unnecessary big purchases like a new car, TV, or other items. To help best increase home equity, find the right loan with our team. Our team of loan experts can help you quickly achieve your home equity goals. Get in touch with a loan officer today.