by Charlotte Wood
(last updated February 21, 2009)
You always hear about building up your home equity and how a good and stable equity will benefit you financially and otherwise. What exactly is home equity and how do you improve it? Home equity is actually quite easy to build up and once you do you'll be rewarded with stable home finances and a valuable home in the bargain.
Home equity is simply the difference between the mortgage value on your home and the actual value of the home. Houses never sell for what they're actually worth and the greater the disparity between the two values, the greater your home equity. Home equity is important to have because it gives you an edge on applying for loans and qualifying for other such financial endeavors. With a high home equity you'll be in good shape for just about anything financial to do with your home because your home will actually be worth something.
The best way to build your equity is to make your payments on time. Ideally the value of your home will be rising at the same time the balance on your mortgage is decreasing. The larger that gap the better shape you're in. Another thing to remember when purchasing a home is if you make a larger down payment, it will increase the equity in your home. Building equity in your home isn't that hard when you think about it—the more you pay on your mortgage, the more your house increases in value. It's a simple inverse relationship.
Another way to manipulate your mortgage so your equity increases is by making additional principal payments (this works doubly in your favor because not only in the principal balance reduced, but the reduced balance also decreases the amount of interest you pay) and by opting for a shorter mortgage term. Both of these actions will increase the gap between the value of the house and the balance of your mortgage, resulting in an increased equity.
Apart from playing the mortgage game with your equity you can also build home equity by making improvements to your home. Improvements to your home will raise the value of the home resulting in increased equity. Generally improvements like remodeled kitchens and bathrooms yield a higher value than installing a pool so the improvements you go out to make should make a significant impact on the value of your home. You want the value increase to be noticeable.
Building equity in your home isn't hard and just takes a bit of mortgage and financial strategy. If you can just keep in the mind the rule of "the greater the gap between the value and the mortgage balance, the greater the equity," then you'll be in an excellent place to start upping the equity in your home. Go out and build that equity!
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