How to Build Equity in Your Home
A few years ago, I set a big financial goal for myself. I decided to become a homeowner, and to buy my first home in cash. If you follow me on Instagram, you know that earlier this year I was finally able to reach that goal. The day I surprised my son and revealed that I saved up enough money to buy our dream home in cash was one of the happiest days of my life.
Personally, I’m in love with our forever home and I don’t have any plans to sell it. But I still understand that it’s a valuable asset. By taking care of my home and building equity in it, I can increase my net worth. I also put myself in a position to leave an inheritance for son.
If you’re a homeowner or thinking about becoming one, it’s smart to try to increase the value of your home over time. Below are some tips you can use to build equity in your own home.
What Is Home Equity?
Home equity is the difference between the market value of your home (aka how much you could sell it for) and the amount you owe on your mortgage. If you own your home outright, then 100% of its market value is home equity.
Building Home Equity
If you have a mortgage, one of the ways you can build home equity is by making your monthly payments. As the principal amount of your loan decreases, your equity should go up. Extra mortgage payments might increase your home equity as well. Just keep in mind that it’s generally best to pay off high-interest debts first.
Haven’t bought a home yet? Putting up a big down payment could help you build equity and save money on interest at the same time.
Besides paying down your mortgage or supplying a big down payment, there are other ways to increase your home equity as well. They involve increasing the value of your property.
- Make home improvements. Not all home improvements are a good investment. But some renovations and repairs could give your property value a boost. For example, you might love the idea of an adding an upscale master suite addition to your house. Yet according to Remodeling Magazine, your home value would only increase by an average of 50% of your investment. On the other hand, a garage door replacement or adding manufactured stone veneer would net you an average home equity increase of 95% of the money you spent on the project. It’s smart to check cost vs. value estimates for home improvement projects before you begin.
- Give your house some curb appeal. Showing some love to the outside of your house might also boost your home equity. Landscaping, gardening, painting, or a new outdoor living space are all potentially inexpensive ways to add value to your home. If you can do some of the work yourself, it can be even more affordable to make these small improvements.
- Be patient. Depending on where you live and other factors, many houses increase in value as time passes. This process is called appreciation. You can estimate the value of your home using free online tools like Zillow or Redfin.
How to Pay for Home Improvements and Repairs
Home improvements and repairs might help you build equity and make your house a more enjoyable place to live in the meantime. Of course, home repairs and renovations are often expensive. If you want or need to do work on your home, you’ll need to figure out how to pay for those projects. Here are two options to consider.
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Use sinking funds to save for renovations.
A sinking fund is a way to set aside some money each month to pay for large expenses. As a homeowner, you need a sinking fund or home savings account you can turn to for unplanned house repairs and planned renovations. Personally, I’m saving money to finish the daylight basement on my new house this year. Of course you'd want to set up a high interest savings account like CIT Bank's Savings Builder account.
- Resource: Printable Sinking Funds Savings Trackers
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Consider a home improvement loan.
It’s best to save money in advance to pay for home renovations and repairs. Yet there are times, like when your furnace breaks in the dead of winter, when you might have to make an unexpected repair. If you don’t have a house savings fund or an emergency fund to turn to, you may need to borrow the money.
It’s best to avoid taking on extra debt whenever possible. But if you’re in a situation where you feel like borrowing money is your only option, take a little extra time to shop around for the best deal first. A lower interest rate could save you money every month, until you can eliminate the debt for good.
- Resource: Compare home improvement loan rates.
Before You Apply for a Loan
Before you apply for any loan, it’s wise to check your credit. A lender will review one of your credit reports and scores when you apply for a home improvement loan. Good credit may help you qualify for financing and secure a lower interest rate.
If you need a free way to check your credit reports and scores, I like Credit Karma.
I also recommend taking a look at your budget and asking yourself some tough questions before you apply for any loan. Do you really need the loan, or can you save first to pay for renovation projects over time? Can you afford another monthly debt payment without straining your budget or hurting your other financial goals?
In some situations, a home improvement loan might be the right choice. But don’t rush the decision-making process. The last thing you want to do is make a financial decision that you’ll regret later. (Been there, done that!)
Bottom Line
Building equity in your home is smart. If you want to increase your home equity, take the time to incorporate the goal into your budget.
You might decide to pay extra money toward your mortgage each month. Or maybe you’ll create some sinking funds to improve your house over time. You can also research which home improvements may add the most value to your property.
Whatever option (or options) give you the most peace of mind, be sure to make a plan. Take the time to figure out your financial priorities and you’ll be much more likely to reach your goal.
