Take Advantage of Your Home Equity: A Homeowner's Guide

Neighborhoods with high rates of homeownership have less crime and more civic engagement. Studies show homeowners are happier and healthier than renters, and their children do better in school. But the financial story is just as compelling: researchers at the Urban Institute found that homeownership is financially beneficial for most families, and a recent study showed that the median net worth of homeowners can be up to 80 times greater than that of renters in some areas.

So how does purchasing a home help you build wealth? And what steps should you take to maximize the potential of your investment? Find out how to harness the power of home equity for a secure financial future.

What Is Home Equity?

Home equity is the difference between what your home is worth and the amount you owe on your mortgage. So, for example, if your home would currently sell for $250,000 and the remaining balance on your mortgage is $200,000, then you have $50,000 in home equity.

The equity in your home is considered a non-liquid asset. It's your money — but rather than sitting in a bank account, it's providing you with a place to live. And when you factor in the potential of appreciation, an investment in real estate will likely offer a better return than any savings account available today.

How Does Home Equity Build Wealth?

A mortgage payment is a type of "forced savings" for home buyers. When you make a mortgage payment each month, a portion of the money goes towards interest on your loan, and the remaining part goes towards paying off your principal — your loan balance. That means the amount of money you owe the bank is reduced every month. As your loan balance goes down, your home equity goes up.

Additionally, unlike other assets that you borrow money to purchase, the value of your home generally appreciates over time. When you pay off your car loan after five or seven years, you'll own it outright — but if you try to sell it, the car will be worth much less than when you bought it. With a home, the opposite is usually true. When you sell, not only will you have grown your equity through your monthly payments, your home's market value is likely to be higher than what you originally paid. And even if you only put down 10% at the time of purchase — or pay off just a small portion of your mortgage — you get to keep 100% of the property's appreciated value. That's the wealth-building power of real estate.

What Can I Do to Grow My Home's Equity Faster?

There are two basic ways to increase the equity in your home.

Pay Down Your Mortgage

Your home's equity goes up as your mortgage balance goes down. So paying down your mortgage is one of the most direct ways to build equity.

Some homeowners do this by adding a little extra to their payment each month, making one additional mortgage payment per year, or making a lump-sum payment when extra money becomes available — like an annual bonus, gift, or inheritance.

Before making any extra payments, check with your mortgage lender about the specific terms of your loan. Some mortgages have prepayment penalties — and it's important to ensure that any additional payments are actually applied to your loan principal.

Another option is to decrease your amortization period — for example, refinancing from a 30-year or 25-year mortgage to a 15-year mortgage. If you can afford the larger monthly payments, you'll grow equity faster and could save a bundle in interest over the life of your loan.

Raise Your Home's Market Value

Boosting the market value of your property is another way to grow your equity. Many factors that contribute to appreciation are out of your control — demographic trends, the broader economy — but there are things you can do to increase what your home is worth.

Many homeowners enjoy do-it-yourself projects that can add value at relatively low cost. Others invest in larger, strategic upgrades. Keep in mind, you won't necessarily get back every dollar you invest. According to Remodeling Magazine's Cost vs. Value Report, the project with the highest ROI is a garage door replacement (about 97.5% return) — while an upscale kitchen remodel averages less than 60%.

Of course, keeping up with routine maintenance is the most important thing you can do to protect your property's value. Neglecting your home's structure and systems can have a negative impact on its value — therefore reducing your equity. Stay on top of recommended maintenance and repairs.

How Do I Access My Home Equity If I Need It?

When you put money into a checking or savings account, it's easy to withdraw it. Tapping into home equity is a little more complicated.

The primary way homeowners access their equity is by selling their home — many sellers use that equity as a down payment on a new home, while others downsize and use it to supplement their income or retirement.

But what if you want to access your equity while you're still living in the home? Maybe you want to finance a renovation, consolidate debt, or pay for college. There are several ways to borrow against your home equity, depending on your needs and qualifications.

Second Mortgage (Home Equity Loan)

Structured similar to a primary mortgage. You borrow a lump-sum amount, which you pay back — with interest — over a set period. Most have a fixed interest rate and provide a predictable monthly payment. Keep in mind that you'll be making payments on both your primary and secondary mortgages, so budget accordingly.

Cash-Out Refinance

You refinance your primary mortgage for a higher amount than you currently owe, pay off the original mortgage, and keep the difference as cash. This may be preferable to a second mortgage if you have a high interest rate on your current mortgage or prefer just one monthly payment.

Home Equity Line of Credit (HELOC)

A revolving line of credit, similar to a credit card. It lets you draw money as you need it rather than taking a lump sum all at once. You only make payments on the amount drawn. The interest rate is variable, so your payment can change depending on how much you borrow and how rates fluctuate.

Reverse Mortgage

Enables qualifying seniors to borrow against the equity in their home to supplement their retirement funds. In most cases, the loan plus interest doesn't need to be repaid until the homeowners sell, move, or pass away.

Tapping into your home equity may be a good option for some homeowners, but do your research first. Defaulting on a home equity loan could result in foreclosure — ask for a referral to a lender or financial adviser before making the call.

We're Here to Help You

Wherever you are in the equity-growing process, we can help. We work with buyers to find the perfect home to begin their wealth-building journey. We also offer free assistance to existing homeowners who want to know their home's current market value to refinance or secure a home equity loan. And when you're ready to sell, we can help you get top dollar to maximize your equity stake. Contact us today to schedule a complimentary consultation.

The above references an opinion and is for informational purposes only. It is not intended to be financial advice. Consult a financial professional for advice regarding your individual needs.