One of the biggest perks to owning a home is that it almost always appreciates in value. While the market can certainly dip from time to time, the long-term, historical trajectory of real estate values shows that homes go up in price. Thus, any time you hang on to a property for a few years, there’s an expectation that you’ll build equity. The question is, how can you build more equity, faster?
Most people say that they’re homeowners when they’re really just partial homeowners. If you buy a house with five percent down on a 30-year mortgage, you technically only own a small fraction of the house. It’ll be three decades before you own the whole thing.
Equity refers to the amount of the home that you actually own after accounting for all debt. To calculate your equity, you simply take the market value of your home and subtract any debt you have on it. If the number is negative, you’re actually underwater. This means you owe more on the house than it’s worth. If the number is positive, this is the amount of equity you have to your name.
Example 1: Your home is worth $400,000 and you have a remaining mortgage balance of $225,000. You take $400,000 minus $225,000 and you’re left with $175,000 in equity. If you were to sell your home and pay off your mortgage debt, this is the amount of money you’d get in return for the transaction.
Example 2: Your home is worth $275,000 and you have both a first and second mortgage on the property. The first mortgage has a remaining balance of $200,000. The second mortgage has a balance of $80,0000. To calculate your equity, you take $275,000 and subtract $280,000 (the sum of all debt). This leaves you with -$5,000. In other words, you have negative equity. This means you’ll actually owe the bank money if you sell the property.
Building equity is one of the primary benefits of homeownership. In fact, if you speak with the majority of wealthy people, you’ll find that they accumulated a significant amount of their net worth via their primary residences.
You might assume that equity is built by patiently waiting on the market to ripen, but this is just one small aspect of it. You have more control and influence than you realize.
There are two ways to build equity:
If you want to speed up the process of building equity, you can’t be passive. You have to proactively attack each side of the equation. In this article, we’ll discuss some techniques and strategies for both.
There’s a practical, hands-on side to building equity and a financial side. If you’re more of a hammer-and-nail kind of person, you’ll enjoy the challenge of increasing property value. Here are three simple ways this happens:
Don’t know the difference between a 2×4 and a 2×6? You can still increase property value, but you’re probably better suited for grabbing a calculator, reviewing your budget, and looking for ways to accelerate debt reduction. Here are some things to think about:
At Green Residential, we’ve proudly served Houston-area homeowners for more than three decades. Whether it’s managing investment properties for our clients, or helping them buy and sell their homes, we have skilled and experienced professionals who are ready to handle any and all of your needs. For more information, please don’t hesitate to contact us today!
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