You hear about building home equity in advertisements.  People tell you that home ownership is a great thing.  But what exactly is home equity? Whether you have been living in a home for five years in Locust Grove, are close to paying off your mortgage in Culpeper, or are considering a new construction build in Rhoadesville, it is important to understand what home equity is and how it impacts you as a homeowner.  

What is home equity?

Home equity is the amount of money you would receive from selling your home at its current market value minus the current amount of your mortgage.  For example, if your home is valued at $375,000 and you have $296,000 left on your mortgage, the equity of the home is $79,000.  The equity in your home increases as you continue to pay down the principal of the mortgage and as the value of your home increases.

Why is home equity important?

Home equity is a long-term way to build wealth.  The longer you stay in a home the more equity you will build.  You can use this equity to purchase a new home.  Some people get a home equity line of credit to use for other projects.  (I would suggest discussing home equity lines of credits with a financial advisor before you obtain one.)  Unlike many other expensive investments like a car, the value of a well maintained home generally does not depreciate over time.

Are there ways to build equity into my home faster?

Yes!  There are some things you can do to help grow the equity in your home.

  • Save for a larger down payment:  The bigger your down payment is, the less you are borrowing and paying interest.
  • Pay your mortgage bi-weekly:  Instead of paying the mortgage once a month, make two payments (each payment half the total monthly payment) bi-weekly.  While it sounds a little confusing, this actually helps you make an additional mortgage payment in the year, thus paying off more of the principal.  You can set up this payment schedule online with many banks.
  • Refinance:  If you are able to afford a larger monthly payment, then consider refinancing.  You will shorten the length of your loan and save a lot of money on interest.  Since interest rates have recently risen, it is worth talking through the different scenarios refinancing can create with a lender.
  • Pay down the principal:  While not as exciting as a tropical vacation, taking some extra money you’ve earned and putting it towards the principal of the loan can help build your home equity.  If it’s in your budget to pay more than the monthly mortgage payment, then put that extra towards the principal.  Just check with your loan first to make sure that there aren’t any penalties for paying off the entire loan early.
  • Home Improvements:  Remember, part of the way you build equity is tied to the value of your home.  Making some improvements like adding an additional bathroom or bedroom, remodeling the kitchen, or upgrading the bathroom can increase your home’s value.  Aren’t sure what projects are worth it in the long term?  Talk with your local Locust Grove, VA Realtor®.