With interest rates low, refinances at all-time highs, and more people looking at getting into the real estate market or at the very least repackaging their home loan, home equity comes up regularly in conversations. From 30,000 feet, home equity is the percentage or dollar amount of homeownership you actually have.
But what’s the big deal with home equity and why is it important? Today, we’ll dive into what you need to know about home equity.
Home Equity Basics
As we’ve already alluded to, home equity is the amount of ownership you have in your home. It can be calculated by subtracting the remaining balance on your mortgage from your home’s most current value. In other words, if you have $75,000 remaining on your mortgage and your home is valued at $100,000, then you have $25,000 in home equity!
Depending on how home equity is used, it may be either expressed as a quantifiable number as in the example above or as a percentage. More on that a little later.
Why Does Home Equity Matter?
Early on in homeownership, home equity doesn’t have quite the impact that it does later. Naturally, you’ll be working towards 100% home equity and in turn 100% ownership, but in the meantime, it may seem like a paltry number.
There are some areas where home equity does matter and carries a great deal of weight. Since the housing crash of 2008, lenders began requiring that most conventional mortgages carry PMI or private mortgage insurance up to the 20% equity mark. Also, as equity increases, your overall net worth increases and will generally give you more buying power if you’re looking to move into a different home.
Ideas for Increasing Home Equity
Increasing home equity isn’t rocket science and there are some things you can do from the outset as well as throughout the lifetime of your mortgage to make a dent in the ownership value you have in your home.
- Make a big downpayment. The bigger the downpayment, the more equity you have right off the bat.
- Make extra payments. Paying more than required for your mortgage can make a significant difference both in home equity and in the term of your mortgage. Consider making extra payments each month or one big payment each year.
- Make home improvements. Remember our calculation for home equity? Increasing the home’s value is one way to boost home equity, and that can often be done with home improvements or renovations.
- Stay awhile. Many first-time homebuyers are quick to upgrade from their first homes. While there’s nothing wrong with that, you have a better opportunity to increase your home equity by staying a few years.
While these tips aren’t the only way to increase equity in your home, they’re the most time tested and proven ways of doing so. Even if you’re strapped for cash, making small dents in your principal will yield big results down the road.
Refinance for Better Rates and More Equity
If you’re like a lot of new homebuyers, your first mortgage may not be the prettiest. Functional, yes, but perhaps it could use some re-tooling. Refinancing is a great way to lower your payments, lower your interest rate, and gain home equity as part of the appraisal process. You’ll be surprised to see just how much value your home can gain after just a few years.
If you’re looking to refi or need some advice, get in touch with Tidewater Mortgage Services, Inc. For over 20 years, Tidewater has helped homeowners maximize their home equity, lower their payments, and get the best mortgage products available!
