Increasing Your Home Equity

Anyone who’s ever started a business knows that you start small, with the ultimate goal of making it as successful as possible. Your home is similar to a small business. When you buy it, you share ownership with a partner—the bank—who most likely holds a substantial stake. Your goal is to buy out your partner—the bank—so that, ultimately, you own 100 percent of the home equity, free and clear of any partners.

Importance of home equity

By increasing your ownership percentage, you’re increasing your wealth. (You do want to become wealthier, yes?)  You unlock the value of your home equity wealth when you sell—the more of it that’s rightfully yours, the more money will remain in your pocket at closing.

Another reason to increase your home equity is that it serves as collateral if you want to borrow cash. Once you’ve accumulated equity, it’s a relatively easy process to take out a home equity loan.

Paths to wealth

There are three steps to building home equity.

1. Prepayment of principal. Each month, when you send in your mortgage check, send an additional principal payment. Each dollar will reduce your outstanding loan amount, and shorten the loan term. If, for example, you have a 30-year loan for $200,000 at 5.5%, your monthly mortgage payment will be $1,398. By sending in an additional $100 each month, you’ll own your home free and clear in a little less than 24 years, savings six years of mortgage payments.  Not only that, but you’ll save $71,256--money that stays in your pocket, not the bank’s. Talk about creating wealth!

2. Refinancing to a shorter term. If you refinance a 30-year mortgage to a shorter term of 15 or 20 years, you’ll pay down your principal balance more quickly also, building equity at a faster pace. There’s a good chance you’ll pay less interest, as 15-year mortgage rates are generally lower than longer-term ones.

3. Home improvements. The more you improve the quality of your home, the more value you create.  A minor kitchen renovation will give you an 88% return on your investment—which immediately translates into higher home equity. A bathroom renovation will give you an 81% return on your investment, and a family room addition, a 73% return. If you do the renovations yourself, you’ll build equity more quickly, as these numbers take into account expenses for a professional contractor. Even something as simple as changing the hardware on your cabinets will increase the value of your home.

Here’s a little secret: The easiest way to increase your home equity is to make your monthly mortgage payments, sit back, and do nothing. Since the 1960s, real estate has appreciated at an average rate of 5% per year. That’s just an average, though, so there will be periods when it’s greater, and others when it will be lower.

Treat your house like a business, make the necessary improvements and pre-payments, and you’ll be a successful owner, letting your home equity carve you a path to riches.