Your Home Equity
Simply stated, home equity is the value of your home once all outstanding debts have been subtracted. You might also hear home equity referred to as “real property value,” because it is the amount of money that the homeowner would be able to receive if the home were sold at its current market value.
For example, the current market value of a property is $500,000. The homeowner still owes $350,000 on the mortgage. To get the real property value, you subtract the debt of $350,000 from the current market value of $500,000 to get $150,000, which is the amount of equity built up in the property.
What Structures Are Included?
When the home’s equity is calculated, it takes into consideration the value of each of the following structures:
. The house
. Stand-along garage and shed
. Pavilion or deck
. Pool house
. Home additions
How Does the Your Home Equity Build Up? Patients
Any amount of money that is paid toward the principal (the sum that you borrow) goes toward the equity of the home. Additionally, a small portion of each mortgage payment goes toward the principal of the loan and increases the equity in the home.
What Importance Does the Equity in Your Home Have?
In addition to the fact that the equity equals the monetary value that you should be able to realize if you sold the home, it provides collateral should you need to borrow more money. The loan that you obtain using the equity in your property is known as a home equity loan.
Home equity is the value of your home after all of your debts have been subtracted from its current market value. When property values go up, so does the worth of your home. Another way to look at home equity is to simply think of it as the amount of money you would have if you sold the home today and paid off all of your debts.
Increasing Your Home Equity
Often times, home owners will rely on a strong real estate market to drive home prices up and increase the equity in their homes. However, the market is unpredictable and can turn downwards quickly as we’ve seen in the past. Thankfully, homeowners have some control over home equity and can take steps to increase the equity they have in their home.
One of the main ways homeowners increase their home equity is by paying down their mortgage—increasing the frequency and amount of payments made each month to a mortgage lender to reduce the amount owed and at the same time increasing home equity and the percentage of home ownership. But it’s not the only way to do it.
Another effective way to build home equity is to make home improvements. This doesn’t necessarily mean complete home renovations with top dollar budgets. It means choosing the right projects and the right budgets that will result in increased home value. The most sought after rooms in the home are by far the kitchen and bathrooms—these areas will return the most money per square footage over any other room in the home. But it’s crucial to manage the cost of a remodel well and not go overboard on luxurious features that will not match the rest of the home or neighborhood. Changing the counter-tops to stone or granite, upgrading appliances to stainless steel, refinishing cabinets, and replacing light fixtures are most effective in yielding a good return of investment. A more recent trend in home improvement for increased equity is the demand for green housing. Buyers are now looking for energy and water efficiency in their homes. Insulated windows and attics, low-flush toilets, bamboo flooring, and water-conserving faucets will do well in showing eco-consciousness.
Home improvement projects can also take smaller forms; ones that the home owner does on their own. When the homeowner puts in his/her own effort and labor to create additional value in the home, it is referred to as sweat equity. These projects include painting and landscaping. Painting will go a long way to give an older home a fresh facelift and well-manicured landscaping will positively reflect on how well the home looks on the inside.
You don’t have to spend huge amounts of money to have an impact on home value. Choose the right projects, budget well, and maintain your hard work. This will give you the best formula to increase your home equity, build your wealth for retirement, and give you an additional financial option for the future.
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