guest blogger: Talia Spero
First, let’s define “home equity”. In the simplest terms, equity is the difference between how much your first home is worth and how much you personally owe on your mortgage.
Now let’s figure out exactly how much home equity you have. If you paid cash for the entire asking price of your home, you own 100% of the equity in it.
If you took out a mortgage, subtract the amount of your loan from the price you paid for your home. Let’s say you and the property’s seller agreed on a price of $250,000. You decided to put down 5% of the purchase price, which is $12,500, and you borrowed $237,500. That means you have $12,500 of home equity, assuming the property appraised for $250,000.
In other words, your home equity is the difference between the appraised value of your home and the amount you currently owe on your mortgage.
There are two main strategies when building equity:
Increase the value of your property
Decrease the amount of debt on your property
You can increase the value of your property by installing attractive landscaping and remodeling important rooms in the house such as the kitchen, bathrooms, and master bedroom.
You can also let the value of your home grow over time. If you live in an increasingly popular neighborhood where property values are going up overall, then it’s realistic to expect that your home equity will increase as well.
However, it is important to note that some markets appreciate faster than others. It’s also possible for home values to devalue due to economic conditions, the conditions of your home deteriorating, or a drop in neighborhood home values.
You will automatically decrease the amount of your mortgage loan by making monthly mortgage payments. And if you want the amount to reduce, even more, try to pay a little bit extra each month.
Now that you’ve built up your home equity, what can you do with it? If your family is growing and it’s time to buy a bigger home, you can sell your house and get cash in return for your equity. This cash can be used for the down payment on your bigger home!