Home equity

Steps to building equity in your home…

What is equity?

Equity is your ownership stake in the house. If your home is worth $300,000 and it’s paid off, you have have 100% equity in the home or equity of $300,000. Most people do NOT have 100% equity in their home, they may have put a 20% (or if it’s an FHA loan 3.5%) down payment and then owe the balance (80% or 96.5%). But that isn’t the end of the story. Beyond whatever your original down payment is, you can build “equity” in a home by doing what you can to improve the value of the home as well.

Most homes will increase in value over time and that means that beyond paying down principal, equity will increase as the home’s value increases because the value increase is YOURS and nothing to do with any debt to a mortgage company.

To use a very simplistic example: If a home’s value increases at 3% per year and the home was valued at $100,000 when it was purchased, the following year it would be valued at $103,000. You owe less on your loan because you’ve been paying down the principal AND if you were to sell your home would it likely get $3k more than it would the year before, and that money is yours.

Here are some ways to increase the equity in your home:

Pay more than you need to on your mortgage.

This is a great option if you don’t have debts that carry a higher interest rate than your mortgage (pay off the highest interest rate debt first), if your home appreciates faster than your 401K or if you aren’t tight on money month to month.

Talk to your lender to make sure that extra payments will go specifically toward principal and then consider either adding additional money to your payment or trying to make at least one extra payment per year.

Here is an example of interest savings and reduction in the life of the loan by making an extra payment, or simply paying a little more each month from Bankrate.com

Here’s an example of how prepaying saves money and time: Kaylyn takes out a $120,000 mortgage at a 4.5 percent interest rate. The monthly mortgage principal and interest total $608.02. Here’s what happens when Kaylyn makes extra mortgage payments:

Minimum every month30 years$98,888$0
13 payments a year*25 years, 9 months$82,870$16,018
$100 extra every month22 years, 6 months$70,944$27,944
$50 extra every month25 years, 8 months$82,452$16,436
$25 extra every month27 years, 8 months$89,864$9,024
*Extra $608.02 payment

Refinance to a shorter term loan.

People often only think in terms of a 30 year loan on a home, but you can finance a home for 15 years at a lower interest rate and pay off your home in half the time. Even better, those aren’t your only 2 choices – you can ask for any term that you like and that will make the rates work for you. Not every lender will have that flexibility, but the ones I work with have been offering off term loans as well.

One thing to consider with this option is that you will have a higher payment that you are obligated to make. You’ll be committed. In the first scenario that I mentioned where you pay a little more every month it’s voluntary and you can set it up to do so automatically so you don’t have to make that decision every month, but you can also stop it if your financial situation changes.

Renovate the interior.

Simple things like fresh paint and new light fixtures can go a long way to improving the value of your home and your equity in it. You don’t have to make it look like an HGTV star lives there – simply having relatively modern fixtures and a home that looks clean and well cared for goes a long way.

If you do choose to do a more extensive update, kitchens and baths are where you’ll see the biggest return. This assumes that you choose a style that is not super trendy or likely to appeal to only a small subset of buyers. Keep things relatively classic and as high quality as you can afford.

Add curb appeal.

Many buyers make their decisions within seconds of seeing a house. You may not be a gardener, but taking care of the exterior of the home goes a long way. No chipped or faded paint. Flowers in pots or well maintained beds. Make your entryway look inviting by having a fresh paint job on the door & quality fixtures. Keep trees and bushes pruned back away from the house and the lawn well cared for and not overgrown. It’s weird that free or inexpensive things like trimming trees and planting flowers can have an impact, but value is also about perception. Square footage is one thing, but condition is another.

Any deferred maintenance on the exterior makes alarm bells ring loudly to buyers and appraisers.

Why does equity even matter?

Well, it doesn’t, unless it does to you. One reason it could matter is if you’ve purchased a home with less than 20% down and want to get out from under PMI. If you are able to increase the value of your home over time or with improvements, you can have the property reappraised and potentially get rid of PMI. If you had an FHA loan you would be required to refinance, but the same theory applies. And, hey! If you had an easy time making your mortgage while paying PMI, pretend you still have it and throw that $100/month at your mortgage principal instead.

Some people want to be debt free, and home mortgages are typically the largest debts we carry. Ridding yourself of a house payment as soon as possible as well as reducing interest payments is a good thing if this is your goal.

Or maybe you use your home as a form of savings account in addition to whatever else you’re doing and plan to sell it when you retire and use the proceeds to buy your beach bungalow or cabin. Or you have kids that will be going to college and you want to be able to use some of the equity in your home to pay for it.

Whatever your goals are, these are a few ways to help you get there.

Home Buying · Home equity

Should you buy a fixer? Here are 4 things to consider FIRST.

HGTV makes it look really easy and smart to buy a fixer but before you do, think about the following things:

Give the location and the price a really hard look. This is where your agent will come in and help you make a clear-eyed decision based on actual data to see if what looks like a good purchase actually IS a good purchase.

You’ll want to have a clear sense of what other homes in the neighborhood have gone for and what the homes offered. How updated are they? How far would this home have to go? Is it cosmetic changes or do you need to shore up the foundation? And even if the foundation is the problem – is it priced where this would make sense to invest in it?

Look for instant or inexpensive ways to create equity. Is the worst thing about the house the flocked wallpaper and shag carpet? If it’s mostly surfaces that need refinishing, and you’re good with a paint brush and can pull up old carpet, your cost for the return will be really low. A fresh coat of paint goes a really long way. One thing that I have considered in the past is what would make the most impact – floors & walls are enormous parts of the home and resurfacing those pieces can really make a big impact on value. MOST people can’t seem to look past bad decorating. If you can – BONUS!

If there are projects that will require professional help – make sure that they are projects that will bring you good return on the cost of having to hire out. Going back to surfaces – having wood floors refinished is a good return. In Minneapolis we have to have our homes inspected for energy efficiency and paying for insulation will increase the price that the home commands, in addition to paying dividends in reduced energy costs. And there are a lot of incentives provided by the city and energy companies in the form of rebates and low interest loans to help home owners achieve the highest efficiency possible. If you live in Minneapolis you know you want low bills and a snug home.

Lastly – evaluate your ability to live in or with chaos. It can be hard at times if you’re living in a construction site. Even if you’re not and you’re trying to manage the project from outside of it, make sure that you can handle set backs, messes, etc. It always looks so much worse before it gets better.

If you’re curious about a way to do this while having someone else help pay – check out my video on house hacking. 🙂

Comments or questions? I’d love to hear from you. If there is a video that you’d be interested in seeing or a topic that you’re curious about, let me know.