What is Equity ?

    What is Equity ?

    Feb 10, 2021

    Building home equity is an important part of homeownership because it’s a resource you can convert to cash when an expense arises. You can draw from the equity using a home equity loan or home equity line of credit or cash in the equity when you sell.

    What is equity?

    Home equity represents the amount of your home that you own, and it can grow over time. Your home equity is the portion of your home that you own, calculated by subtracting your mortgage balance from the home’s market value.

    To build home equity, you can either increase your property value

    or decrease your mortgage debt.

    Here are a few options

    Make a big down payment

    Your down payment kick-starts the equity you build over time. Depending on your mortgage options, you could put down as little as 3 percent or even 0 percent when you close on the home — but putting down more will instantly boost your equity.

    Increase the property value

    Making key home improvements can boost your home’s value — and therefore your equity.

    Pay more on your mortgage

    While you’ll always pay both principal and interest, a larger portion of the payment goes toward interest in the beginning, and over time more goes toward the principal. However, if you make extra payments toward the principal every month, you build equity quicker by decreasing the overall total you owe.

    Switch to biweekly mortgage payments

    Split your mortgage payment in half and send each half every two weeks instead of once at the end of the month. This adds one extra payment to your mortgage every year, which can ultimately shorten your loan term.

    Add a certain amount each month

    Check your budget to see how much extra you can realistically put toward your mortgage every month. For example, if you just paid off your car loan, consider putting that extra $250 toward the mortgage every month.

    Use occasional extra money

    Anytime you receive a tax refund, bonus at work or cash gift, put it toward your mortgage balance.

    Refinance to a shorter loan term

    A shorter loan term has two main benefits: You typically get a lower interest rate, and more of your mortgage payment goes toward the principal each month.

    Wait for your home value to rise

    Local housing markets change over time, so your home value may fluctuate. When home prices increase in your neighborhood and demand grows, the value of your home naturally rises. This appreciation in home value boosts the amount of equity you have.