Your home is likely the biggest investment that you’ll ever make, and like any other investment, it pays off when you take care of it.
As you’ve been shopping for a new home and learning about what you can afford, you’ve probably heard about building equity, but not known what exactly that meant. Don’t sweat it: There are a lot of current homeowners that don’t know much about equity either.
Your home’s equity is something like a forced savings account. You’re not really putting money into it every paycheck exactly, but if you’re paying your mortgage on time, you’re building equity without even realizing it.
For all of your equity-related questions, we’ve got answers. Here are a few small tips on building equity into your home.
What is equity and why do you need it?
In layman’s terms, equity is the difference between your home’s market value and what you owe on your loan. Each time you make a mortgage payment, you increase your equity. When your home’s value starts to go up — the neighborhood becomes more attractive, schools get better or big businesses move nearby — then your equity will grow at a faster rate than your home’s value.
Now you’ve got a you’ve got a forced savings account with your equity, and if you’re in your home for several decades, that could become a great nest egg for you. When you retire and want to downsize, you may walk away with $10,000 or even $30,000 more than when you bought your home, and you can use that money however you see fit.
When you have equity, you can use it as a line of credit for major life expenses. It’s best to do this in moderation, but if you want to help pay for college or make a major home repair, having that line of credit can be a lifesaver.
Essentially, there are two ways to build equity into your home: paying off your loan at a faster rate or improving on the property. Doing a little bit of both will help you as you’re building equity into your home.
How to pay off your loan faster
As we mentioned, equity is the difference between your home’s market value and what you still owe on your home loan. If you’ve been paying your mortgage for five or 10 years, then you’ve likely built up some equity now that you owe less on your mortgage. This monthly bill you pay is just one small way of building equity into your home.
So with that in mind, paying off your loan faster will build equity faster, and that starts with your down payment. Ideally, you should be putting down 20% of the purchase price of the home. If you’re home costs $200,000, then you should be putting down $40,000. Of course, this is all easier said than done, and if you can’t quite make the 20% initially, you can still buy and pay for mortgage insurance, which insures your credit lenders if you default. In some areas, paying mortgage insurance with a mortgage itself can still be cheaper than renting, so speak with a lender or use an online calculator to see what your monthly payments might be like.
Paying down a mortgage faster likely feels overwhelming, but if you’re building equity into your home, you’re actually saving more money in the long term by paying off more of your loan now. Here are a few small ways of building equity into your home through mortgage payments:
- Increase your monthly payments by a twelfth: Take your monthly payment (excluding homeowners insurance or mortgage insurance) and divide it by 12. Now add that amount to your mortgage and pay that amount each month. By the end of the year, you will have made an extra payment. After 12 years, you’ll have taken off a whole year of payments. That might not seem like much, but that’s a huge savings in interest.
- Round up your payments: If your budget allows it, try rounding up your payments so you pay a little more each month without breaking the bank. Overtime, these extra payments will bring down loan amount.
- Pay biweekly instead of monthly: This method makes your payments a little bit larger, but by the end of the year, you’ve made another month’s payment without noticing.
- Spend gifts, inheritance and other bonuses on your mortgage: If you find yourself unexpectedly with a good amount of extra cash, either from an inheritance or a bonus at work, don’t spend the money on a vacation. Use it to pay down your mortgage.
- Use one partner’s salary to pay off the mortgage: This is an extreme tactic, and few people are fortunate enough to be able to do it, but you could live off one partner’s salary while using the other to pay off the mortgage and make bigger payments.
Each person’s home loan and financial situation is different. If you’re interested in pursuing any of these ways of building equity into your home, speak with a lender or financial planner. He or she can help you find ways of saving money.
How building equity into your home can be done through home renovations
As we mentioned, equity can increase naturally as your home’s value increases overtime. Your neighborhood may become the hip, trendy place where everyone wants to move or a major business may decide to move in nearby (think the Energy Corridor in Houston). But you can start building equity into your home all one your own through home renovations.
When we talk about home renovations here, we’re not talking about a new paint color in your living room or granite countertops in your kitchen. While these can be nice upgrades, they usually don’t increase the value of the home by that much. Now if you want granite countertops in your kitchen, you can put them in, but if you’re specifically building equity into your home, then there are many other home-improvement projects that will give you more value for the money you put into your home — remember you first have to put money into your home to get more for it when you sell it.
These equity-building projects aren’t always glamorous or even noticeable for most people, but when you’re trading numbers with a buyer, you’ll be glad you made these simple upgrades.
When buyers drive up to your home, the first thing they’ll notice is the curb appeal. But you don’t need to add a pool or intricate water feature to wow buyers. What most buyers are really looking for in terms of curb appeal is just a solid canvas, which means:
- A well-kept lawn
- Trimmed trees and bushes
- Clean flower beds
- Pressure-washed driveway and sidewalks
Most buyers will have their own ideas for what they want to do with a yard, so it’s better to clear the way for them, rather than make them rip out trees or take out fountains.
Landscaping doesn’t require much of an investment. You just need to keep up with it. That means scheduling regular pressure washing services to get your driveway and sidewalk clean and mowing your lawn regularly. If you’re planning to sell soon, avoid planting new trees or bushes. Instead, liven up your space by planting small annuals. These flowers come in bold colors, but they need to be replanted every year. If the new buyers don’t like the color, then they can either take the flowers out right away or just wait until the next year.
Have you ever walked into an older home’s living room and immediately felt a draft when standing near a window? That’s what happens when your windows are too old and not energy efficient. You immediately feel chillier just by sitting in the room for too long.
Energy-efficient improvements mean more than just comfort in the house. They also mean savings on monthly energy bills. Installing energy-efficient windows will keep the heat out and the cold air in when summer hits, and when it gets chilly out, your windows will keep the heat inside your home. Energy-efficient windows also heat and cool your home faster, which takes pressure off your heating and cooling system.
Altogether, having energy-efficient windows can save you several hundred dollars per year on your gas and electric bills. Moreover, replacing windows can be a costly job for a new homeowner, and if they have to do the work, you can bet they’ll be bringing that to the negotiating table when it comes time to talk house price and closing costs.
Insulating your attic or basement, also an energy-efficient project, can give you some of the best return on your investment. It will help you regulate the temperature of your home while saving you money on your energy bill, and buyers will appreciate having that savings passed on to them.
Kitchen and bath remodels
Kitchens are perhaps the most popular rooms in the entire house, and bathrooms aren’t far behind. For people who love to cook, having a large kitchen with plenty of space is a big must-have on their lists. For those with families, kitchens with room to move around and even space to put a table or add a breakfast bar can be a hot commodity.
Now kitchen and bathroom remodels can build equity into your home, but rather than thinking about a remodel in terms of luxury, you should be thinking about it in terms of functionality. If you’re not careful about your budget, a kitchen remodel can end up costing you $75,000 or even $100,000 for the most luxurious kitchens, but here’s a secret — you won’t build any equity with that investment. You’ll end up losing money.
Instead, think about what your kitchen or bathroom needs to become more functional. In kitchen for example:
- Is there enough cabinet space? Can you find a creative way to create more?
- Is the kitchen perhaps too big or expansive, with the stove and refrigerator at opposite ends of the room?
- Are the countertops cracking?
- Are the cabinets showing signs of wear?
When it comes to remodeling the kitchen, ask yourself these questions and how you can improve them to further improve the functionality of your kitchen. If your kitchen really is too big (are you filling up all those cabinets and drawers with things you use?), you might consider refitting it to put appliances closer together while adding a built-in breakfast nook. There will still be plenty of room for cooking, but now you’re not wasting space with extra countertops you never needed.
Bathroom remodels should be thought of in the same way. You don’t need to add double sinks to every bathroom, but if you lack storage, consider adding a vanity with space below for towels and toiletries or add a medicine cabinet above the toilet.
For both rooms, avoid the flashy luxury finishes and products. You won’t make your money back, and most homeowners won’t want to pay extra for them. Avoid granite countertops or marble backsplashes and luxury appliances, and instead make modest upgrades to the look of your kitchen or bathroom. Change the hardware on your kitchen cabinets to give them a facelift or install a new kitchen faucet that can be pulled down and change streams. In the bathroom, change outdated looking fixtures and make it as functional as possible.
Building equity into your home can be like the retirement account you never even have to think about. You pay into it whenever you pay your mortgage, and it will make a world of difference when you decide to sell or retire. By paying off your mortgage faster, you save money because you have to make fewer interest payments. When you make smart home improvements, you build the value of your home by making the essentials of the home — the lawn, the structure, the functionality — better and more desirable to any homeowner. Remember, not every home buyer will be a cooking fanatic, but every home buyer will want to save money on electric bills and have a nice lawn.
Tell us: How are you building equity into your home? Share with us in the comments and let us know how our pressure washing services can help.