Equity is one of the most significant benefits of buying and owning a home, but it can feel a little bit elusive. You may hear the phrase, “Owning a home is an investment,” but what does that mean, and how do you cash in on it?
What is Equity
In short, equity is the amount of your home you own. If you were to sell your house after owning it for several years, it’s likely you’ll get some money out of the sale. That money you would get back is your equity. The amount of equity you have depends on how long you’ve been in your home, how much of it you’ve paid off, and how much the value of your home has increased.
How to Gain Equity
There are a few different methods you can use to gain equity on your home.
Larger Down Payment
One of the fastest ways to gain equity is to put more money down when you purchase your home. Typically, 20% is the benchmark for down payments, but there are a variety of options if you can’t afford to put that much down. Many of these options come with required monthly private mortgage insurance (PMI), which falls off when you gain 20% equity. Putting more money down just means you own more of your home, therefore you have more equity.
On-Time Payments
The most straightforward and common way to gain equity on your home is to simply pay your monthly mortgage payment. As you pay on your loan, that money comes back to you in the form of equity. If you want to gain equity faster without changing your loan, you can make extra payments or occasional lump sum payments.
Appreciation of Value
Home values are a hot topic in the mortgage industry as values continue to trend upward. If you purchase a home, it’s likely that over your years of ownership, the value of your home will increase. This is passive equity you can cash in on later that you likely didn’t have to do any work for. Value appreciation happens with changing market conditions, supply and demand, and inflation, so it’s likely your home’s value will ebb and flow - but home values have been on a steady trend upward since 2009.
Remodels/Home Improvements
If you’re looking to build up your equity before you put your home up for sale, it might be a good idea to consider a remodel or making home improvements. This will allow you to increase your home’s value before you sell. If you’ve lived in your home for a long time you’ll likely already have a fair amount of equity, but making updates to your home will raise the value and make your home more attractive to potential buyers. Something as simple as fresh paint or updated light fixtures can maximize the value of your home, thus maximizing your equity. This blog has ideas you can use to make simple home improvements to maximize value.
Why Equity is Important
Equity is crucial to your investment of homeownership because as you build equity, you’re building an asset. In addition, building equity of any kind helps to build wealth. Every time you make a payment toward your home, you’re making a payment towards your personal net worth.
Think of equity as collateral. As you build your equity, you’re building up the amount of wealth you’ll be able to cash in on later. Homeownership is one of the most important investments you can make in your life, and it’s highly likely to pay off down the road.
How to Cash In on Equity
Selling your home is the most surefire way to get the most out of your home’s equity, but there are other ways you can get your return on investment while staying in your home.
Refinance
One of the most common ways to cash in on your home’s equity is to refinance your mortgage. With a refinance, you can maximize your investment by potentially shortening your loan term, lowering your mortgage rate, and cashing in on your acquired equity. Refinancing allows you to reshape your financial picture while staying in the home you love. For more ways refinancing can save you money and help you access your equity, check out this blog.
Home Equity Line of Credit
If you’re not in a position to refinance, or you’re trying to maximize your mortgage on a new home, a Home Equity Line of Credit (HELOC) can help you access your equity. A HELOC is essentially a second mortgage you can use to access equity without needing to refinance. You can use a HELOC to reinvest in your home through renovations or consolidate debt to clean up your financial landscape. You can check out this blog to learn more about how a HELOC can help you access your equity.
The Bottom Line on Equity
Equity is one of the most important aspects and one of the biggest benefits of homeownership. Gaining equity will not only help you build wealth, but you can also cash in on that equity to use for other purchases. Ready for an assessment on your mortgage to see how you can maximize your equity? Contact one of our Flat Branch Home Loans lenders today!
