Home equity is the current market value of a home minus the remaining mortgage balance. It is how much value the homeowner “possesses” in their home/real property.
For example:
If a homeowner has a property worth $250,000 and has paid $50,000 (as either a down payment, or monthly mortgage payment principal) the homeowner’s equity is $50,000.
Current market property value: $250,000
Loan Amount: $200,000
Home Equity: $50,000
As time goes on, a homeowner’s home equity will fluctuate for a variety of reasons, some of which are in the homeowner’s control (home improvements, paying off mortgage) and others not (overall market trends, ratings of neighbourhood schools).
How do I build my home equity?
Paying Down Your Mortgage
The easiest and most common strategy to building home equity is to pay down your mortgage. Each time the monthly mortgage is paid, your home equity will increase, and the loan amount will decrease.
A mortgage is built from two parts: the principal and interest.
The principal is the amount that was borrowed from a lender while interest is what a lender charges in exchange for lending you the money.
The less you owe on your property, the more of it’s home equity you possess. Making payments larger than your minimums results in a larger portion of your payment going against your loan principal.
Which, if practiced consistently, results in:
- Home equity being built faster
- Paying your loan off faster
- Paying less interest over the life of the loan
Making Home Improvements
Improving your home is another way to increase your property’s equity. Many upgrades, repairs, and/or permanent additions to your property can raise its current market value, and therefore your home equity.
The list can go on forever but here are some common home improvements that can increase your home’s equity:
- Installing a new pool
- Updating your kitchen and bathrooms
- Improving your landscaping/curb appeal
- New appliances
- Upgrading finishes such as counters and flooring, or other amenities.
Repairing or upgrading the roof, driveway, porch/patio or any other features can also contribute to your equity in your property.
Appreciation
A home’s value can appreciate for a number of reasons including it’s location, value of the land it sits on, or as a result of changes in interest rates and inflation.
When the local real estate market is growing, property prices rise or appreciate, for (potentially) all the properties in that market. As a corollary; when a real estate market is declining, property values can depreciate with the market.
Even though the strength of your real estate market can directly affect the home equity in your property, the factors that influence these market trends are largely out of a homeowner’s control.
