Owning a home in America can actually increase your total wealth. It sounds like an anomaly when you consider the monthly mortgage bill that must be paid. Sometimes it seems like paying for a home is putting you deeper in debt. The large payment amount multiplied by the number of years for repayment can seem overwhelming. But, as time progresses and more payments are made the actual cash value accrued on your home after liabilities increases. In other words, the value of your home minus the mortgage and other related expenses equals your portion of the home’s value. The more you pay those liabilities, the more the home is worth to you.
There are several ways to increase home equity. Making a large down payment on a home gives you a head start on equity. If the total down payment is $15,000 on a $150,000 home and your mortgage covers 90 percent of that cost, then the equity is 10 percent or $15,000. You can also increase home equity by paying more than the minimum required on the mortgage bill. The additional money pay the principle amount of the loan and this also adds to the equity. Finally, as property values rise, so does the equity amount. Homes regularly appreciate over time. You don’t earn appreciation on the down payment amount. It is calculated using the total home value. Therefore, if property value increases by 5 percent, the new total home value is $157,500 and home equity shoots up to $22,500.
Amortized loans are paid back in full during the period of the loan. As you pay the loan back the home equity value steadily increases until you have paid back the entire loan amount. Once it is completely paid, equity will equal the total purchase value of the home because there are no liabilities to subtract. Short term loans increase home equity much sooner than longer term loans. Stay away from interest-only loans and adjustable rate mortgages with payment caps. Interest-only loans are not amortized so they do not increase equity. ARMs with payment caps actually decrease home equity because often payment caps prevent you from paying the full amount of interest accrued on the loan. Any unpaid interest is added to principle and decreases home equity.
Home improvements and maintenance can also increase home equity, especially if you are considering putting the house up for sale. The two most valuable home improvement areas are the kitchen and bath. This remodeling recoups nearly 90 percent of its cost. In comparison, adding a pool or landscaping will only give you a payback value of 30-60 percent.
It is important to attain even a small amount of home equity. It increases your total worth in assets, and it provides leverage if you ever fall on financial hardship or need to finance a huge expense. Many people who refinance get home equity loans to pay for college tuition, buy a new car or pay tremendous medical bills. Home equity loans provide a quick supply of cash at a reasonably low interest rate.