Because of depreciation, many assets lose value when you pay them off. Homes, however increase in value over time so building equity in your home is a great strategy for building wealth and financial security.
What is home equity?
Home equity is often considered a homeowner’s largest asset. It can be calculated by subtracting the total home loan(s) balance from the home’s market value. For example: if your current debt on your home is $200,000 and your home’s current market value is $250,000, you have approximately $50,000 in equity.
Why is home equity important?
Home equity is an asset so it’s part of your net worth. Having home equity can be extremely valuable as it can be used for:
– Making home improvements
– Purchasing another home
– As an emergency fund
– To pay down other high rate loans such as credit cards
– To invest
How is home equity built?
In order to build equity, a home’s loan balance must go down and the home’s value must go up.
To reduce loan balance:
– Make a large down payment
– Make extra loan payments
– Consider a 15 year mortgage vs 30 year
– Consider a refinance at a lower rate or for a shorter term
To increase the home’s value:
– Maintain the home properly
– Make high return on investment home improvements (indoors and outdoors)