LOVELAND – The most important benefit to owning a home is equity. It is essentially a savings account that you can later tap into. Equity is how you build wealth with real estate investments, thus the goal is to grow and maximize it. When you purchase a home, there are three primary ways to build equity.
1. Pay down your mortgage
Every month, your mortgage payment goes towards both principal and interest. Unfortunately, early on, most of it covers interest since that is calculated against the mortgage balance. However, this does gradually shift over time.
You can speed up the process by making extra payments directly towards principal. Your standard monthly payments remain the same moving forward, but your mortgage will be paid off sooner. Since your principal is lower (from the extra payment), the interest charged each month will be less. Therefore, more of your monthly payment will apply to the principal, speeding up your equity growth even more.
2. Improve your home
Another way that you can change your home equity is through home improvements. For instance, if you spent $3,000 to add a deck or patio to your home and it increased your home’s value by $5,000, that results in $2,000 of additional equity. The type and quality of renovations can vary based on your geographical region. Visit remodeling.hw.net/cost-vs-value/2018/ to look up the value of common home improvements for your area.
3. Market appreciation
As home prices rise, that directly and instantly increases your equity. Imagine that you purchased your home for $400,000. If you made a 5% down payment, you would have started out with $20,000 in equity and a loan of $380,000. If home prices rose to $420,000, your equity would grow by an extra $20,000 ($40,000+) simply from market appreciation!
Accessing your equity
Once you’ve built equity, there are many things that you can do with it. You can cash-out some of it to pay off other higher-interest loans, finance home improvements, or fund other investments. If you are selling, that equity can be put towards the purchase of a new home (and cover the costs of selling and buying). The opportunity to build equity is something not available through renting!
Suzanne Plewes is a broker associate at RE/MAX Alliance. Write to 750 W. Eisenhower Blvd., Loveland, CO 80537, call 970.290.0373 or e-mail firstname.lastname@example.org.