As a homeowner, you’ve probably heard about your home equity, but you might not know all the details. The good news is understanding your home equity is pretty simple. The more you know about it, and think about it strategically, the better off you can be over the long-term.
Here’s what you need to know.
What is home equity?
Your home equity is the value of the part of your home that you own. The number is the difference between your home’s current value and what you have remaining on your mortgage.
Here’s an example:
Let’s say you have $250,000 left on your mortgage, and your home is valued at $400,000 right now. In this case, your home equity is $150,000, which is $400,000 minus $250,000.
When thinking about home equity, something to remember is it’s not static. It can change all the time as you continue to pay your mortgage each month, your equity changes. It will also fluctuate depending on market conditions. For instance, in a strong market, your home could have a higher value, which can increase equity.
Why should you think about your home’s equity?
It’s important to think about because you might want to use it at some point. Even if you don’t plan to, there might come a time where you need funds, and a home equity loan or cash-out refinance might be convenient options to explore.
Also, finding ways to increase your home equity can benefit you over the long term. It can help you:
- Get rid of PMI (private mortgage insurance)
- Increase your net worth and gain more financial security
- Help pay for improvements to your home
- Afford a bigger home if you move again – If you aren’t moving into a new home, you can use the proceeds from a sale to help fund your retirement accounts or pay off debt.
- Consolidate other debts into more affordable monthly payments
If you think you might need to use your equity at some point, it’s a good idea to think about ways you can start building it now. It often takes dedicated time and effort to increase home equity, but thinking ahead can make a difference.
Some strategic ways to increase your home equity over time
Although you can’t fully control your home equity, based on outside factors, there are a few things you can do to help increase equity over time.
Here are a few approaches you can take:
- Make a big down payment: When you get ready to buy your next home, consider putting down a large down payment. That’s an easy way to get a chunk of equity in your home immediately.
- Increase your mortgage payment or make 1 extra payment per year: Take a look at your amortization table, and you’ll see your mortgage payment schedule. If you add a little more to your monthly payment, you can increase your equity and potentially pay off your mortgage faster.
- Consider home improvements: Another approach is to try to improve your home’s value. See what kind of improvement projects you can take on that will have a high return on investment. Even small improvements to your curb appeal can make a difference.
- Stay for a few years: You can also build up some home equity by staying in your current home for at least five years. While there’s no guarantee in the housing market that your home’s value will increase over time, you have a better chance if you stay in your home longer.
Your equity is an important part of your home’s financial picture, so it’s something you want to pay attention to over time. If you focus on building your equity, you can potentially see some benefits later on.