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Increase Your Home Equity & Grow Your Net Worth

Dan Green
The Mortgage Reports contributor

Building Wealth Through Real Estate

Among the big promises of homeownership is that owning a home can help you build personal wealth faster. So much so that building wealth through real estate is a core tenet of the “American Dream”.

And, for today’s U.S. homeowners, it’s a promise that’s come true absolutely.

Since 2012, helped by mortgage rates, U.S. home values have climbed more than 30% nationwide, returning to last decade’s pre-downturn levels.

This rise in values correlates with an increase in home equity among the country’s homeowners, growing their wealth-on-paper by a collective billions of dollars nationwide.

Renters are seeing none such gains.

As home equity increases, homeowners also find themselves eligible for lower mortgage rates via refinance; able to cancel remove private mortgage insurance (PMI); and, having the option to diversify their wealth via cash-out refinance.

Verify your new rate (Jul 18th, 2019)

What Is Home Equity?

By way of definition, home equity is what you “own” of your home. It’s the difference between what your home is worth, and what you owe on it via your mortgage.

Home equity belongs to you and is a part of your overall net worth. However, home equity can’t be spent. Home equity is only “money on paper”.

This is one of the many reasons why home buyers should out thought into their down payment size.

Making a larger down payment will reduce the amount you borrow and lower your monthly payments, but making a down payment comes at a cost, too — you lose direct access to those funds.

This is because once your monies are paid toward a home in the form of a down payment, your down payment converts to home equity and home equity can only be access in one of two ways — you can sell your home, or you can cash-out refinance it.

When you sell your home, you’re paid the value of your home minus whatever’s owed on it. The difference — your home equity — you get to keep as cash.

Or, via a cash-out refinance, you can increase the size of your loan so that your former mortgage gets paid-in-full, with some amount leftover. That leftover amount — which comes from your home equity —  is paid to you as cash.

There are no other ways to re-gain access to your equity so make your down payment with care.

Verify your new rate (Jul 18th, 2019)

Low-Downpayment Loans Affect Equity

Today’s home buyers have a multitude of mortgage options and choices.

There are mortgage loans available for buyers who plan to make low down payments on a home, or no down payment at all; and, there are loans for buyers who plan to make downpayments of twenty percent or more.

However, down payments converts to home equity at the point of purchase, so be sure to make a plan for your finances.

For example, if you have 20% to put down on a home, but you feel that putting 20% down will make you “house poor”, consider reducing your downpayment to something smaller.

As any homeowner will tell you, homes “break” and life goes wrong. It’s a terrible feeling to have nothing in the bank because you spent it all on a downpayment.

And, besides, private mortgage insurance isn't so terrible.

Some of the more common low-downpayment mortgages include the FHA loan, which allows for a downpayment of just 3.5 percent; and the Conventional 97 which requires just three percent down.

The 80/10/10 — also known as the piggyback — is common among buyers.

There are zero-downpayment mortgage options, too.

For buyers with military experience, the Department of Veterans Affairs offers the VA Loan Guaranty Program as part of the VA benefits package. The program requires nothing down, and mortgage insurance is not required.

And, for buyers in less-densely populated parts of the country, such as rural areas and many suburbs and exurbs, the USDA 100% mortgage can be used. This loan is no-money-down, too, but it does charge mortgage insurance (although at a lower cost than comparable conventional loans).

Verify your new rate (Jul 18th, 2019)

How To Build Your Home Equity

Home equity is the difference between your home’s value and what’s owed on your home to your lenders. Therefore, there are two ways to build home equity.

  1. You can increase the value of your home
  2. You can reduce the amount you owe on your home

Regardless of your original down payment, these four methods can increase the value of your home equity, which will increase your household net worth.

1. Wait for real estate values to rise

Okay, so this method is out of your control. As home values rise, your home equity (and net worth) grows. Conversely, when home values fall, your net worth drops. You can’t affect how home prices change, so it’s best to changes in home value a function of being lucky/unlucky.

Between 2006-2011, homeowners were mostly unlucky. Nationwide, home values dropped by thirty percent, on average. However, in the years since, home values have recovered in full.

If you’ve owned a home since 2012, you’ve likely experienced a large increase in home equity — and overall personal net worth.

There’s no guarantee that home values will rise in the future. However, demand is outstripping supply right now, pushing values higher into the near-term.

2. Send additional principal with your mortgage payments

As a homeowner with a mortgage, it’s your prerogative to send “extra payments” to your lender each month and, when you do, these extra payments are applied to your loan’s principal balance.

This means that each extra payment reduces the amount you owe on your home, which increases your home equity dollar-for-dollar.

If you send an extra $100 to your lender this month, you immediately increase your home’s equity by $100.

Be careful with this approach to building home equity, though, because once you send cash to your lender, it’s “locked up” and inaccessible except via refinance or a sale of your home — just like with making a downpayment.

3. Make home improvements which increase your home’s value

Home improvement projects can increase the value of your home which, in turn, increases your amount of home equity. However, not all projects will give you the same sort of return.

For example, adding an extra bedroom or bathroom to your home will do much more to increase its value than replacing appliances or painting a room.

Landscaping and “curb appeal” projects tend to have a high return on investment. Home office remodeling does not.

4. Reduce your mortgage loan term from 30 years

Another way to increase your home equity is to systematically plan for it. That is, choose a mortgage option which accelerates the rate at which your principal balance is repaid.

An excellent example of this is refinancing your 30-year mortgage into a 15-year one.

Homeowners with 15-year fixed-rate mortgages reduce their long-term interest costs by more than sixty percent; and, pay gobs more principal monthly, which increases their home equity and net worth.

Refinancing into a 15-year mortgage is common among homeowners with long-term retirement and savings plans.

What Are Today’s Mortgage Rates?

Home equity is a measure of personal wealth, and there are plenty of ways to affect how your home’s equity percentage grows.

Take a look at today’s real mortgage rates now. Your social security number is not required to get started, and all quotes come with instant access to your live credit scores.

Verify your new rate (Jul 18th, 2019)