How to Build Home Equity

sarahheller By sarahheller, 14th Oct 2011 | Follow this author | RSS Feed | Short URL
Posted in Wikinut>Money>Mortgages

Building home equity is an important part of becoming more financially secure. Home equity is defined as the total value of the home minus any outstanding loans taken against the house, such as a mortgage. By building home equity, a person or family can works towards having a paid off house and build a nest egg that can be tapped in case of an emergency.


There are essentially two ways to build home equity. The first is to pay down any mortgage debt, and the second is to build the overall value of the home. Many people typically choose a combination of the options. Paying off the mortgage against the house is the most common way to build home equity. It is also the easiest. By simply making mortgage payments every month a family or person can slowly pay down their mortgage, decreasing the overall amount owed on the house.

Of course, this method can take decades before the amount of equity in the home meets the total value of the house. For this reason, many people who want to use this method to increase their home equity often make extra payments on their mortgage. By paying extra money each month or by making an extra mortgage payment every year, a mortgage can be paid off years earlier.

The second method of building home equity is to increase the value of the home. This method is more complicated and riskier than simply paying off the mortgage, since it involves having to make improvements to the property and assume that they will increase the selling price of the home. Adding a new bathroom, upgrading the kitchen, or even improving the landscaping can all add value to a home. Each of these improvements, however, is dependent on the neighborhood, quality of the improvement, overall real estate market, and type of improvements throughout the rest of the house. A $100,000 kitchen remodel, for example, could probably add $100,000 of value to a $400,000 house in a neighborhood with other half million dollar homes. The same improvement in a neighborhood of $100,000 homes would not add the same value to a house, however.
No matter how a homeowner chooses to build equity, they will still need to protect their investment with homeowner's insurance and pay property taxes. This means that no matter how high the equity in a home is, a homeowner will always have some costs associated with owning the home. A homeowner will also have to keep up with maintenance on the home in order to maintain its overall value.


Equity, Home Equity, Mortgage, Mortgages

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author avatar Rose*
22nd Nov 2013 (#)

Paying down your mortgage has the advantage of securing the roof over your head should things go wrong. So pay off debt first, and then do home improvements if you have money left over.

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