Pro Tips for Building Equity in a Home
You might not think of your home’s value as yours yet unless you have your mortgage fully paid off. As long as you have made one payment on your mortgage though, you have begun the process of building equity in a home.
Equity Basics
Put into layman’s terms, equity is the value of your home that you own. When you take out a mortgage, the bank owns part of your home, you own the other part, so to speak. When you purchase a house that costs $100,000, for example, you typically put down 10 percent, or $10,000. That leaves you with a mortgage of $90,000. You have ten percent equity in the home at the beginning.
Equity is the value of your home that you own.
Let’s say you do not have that though. You find a great house at a great price, but you have no money to put down. You take a mortgage for the full home price of $100,000.
The first day you take out the mortgage, you are considered to have zero equity in your home. The bank has 100 percent. The following month, you make your first mortgage payment and begin building equity in your home. For ease of explaining, let’s say you took out a relatively short-term mortgage and your monthly payment is $1,000. Within one year of timely payments, you own a little more than 10 percent of the equity in your home.
How You Earn Equity
As you make payments, you earn equity. The quicker you make payments, the faster you accrue equity.
You can pay off your mortgage more quickly by contributing a payment to it biweekly instead of just once per month. Tighten your budget to do this or contribute income from another area.
You can get a second job on weekends to earn extra for building equity. You could also contribute one spouse’s total paycheck to the mortgage each month. This also takes careful budgeting.
Make extra payments to it with your income tax refund or other windfalls. If your business hands out bonuses at Christmas or the New Year, put that toward your mortgage.
You can quickly pay off your total mortgage and own all the equity in your home. It just takes a little effort.
Tips to Build Home Equity
It is not all about money. You can build equity in your home by remodeling it or repairing it. Some items take a weekend and a few hundred bucks, others take a few weeks and cost tens of thousands.
Little Things to Upgrade
When you purchase a fixer-upper house, even the bank has little equity in it. It holds little value when you first purchase it because of its disrepair. However, as soon as you begin repairing it, you increase its value.
New windows? Check. You added to your equity.
Upgrade the shower and the bathtub. Check. You added to your equity.
Re-paint the exterior and interior. Check. You added to your equity.
The smallest items that improve the look and feel of your home add to its value. The larger items really add to its value. Every improvement contributes to building equity in a home.
Replace your old carpet with a new carpet or choose laminate or ceramic tile flooring. You can also ditch the popcorn ceilings and quickly improve the home’s value.
Let’s say you add a deck to your home. Boom! You increased its value. Remodeling an outdated kitchen adds lastingly to the equity in the home. So does insulate the attic and adding a bathroom.
Landscape your home. Plant trees and a garden. Put a walkway from the curb to the front door if there isn’t already one. These items make a huge positive impact, but they cost extraordinarily little. Garden seed and a handful of small trees that grow quickly cost about $100. You plant them yourself and your home value instantly increases. Spend another $100 on pavers or stepping stones to put in a pretty walkway that adds instant value.
Big Upgrades to Make a Little at a Time
Many ways exist to raise your home’s value without making huge investments, but some do cost a bit. The kitchen and bathroom options each cost about $10,000 to $15,000 when done right. You can do the redo a little at a time though and still have the same impact at resale. Tackle the cabinets first. Strip them. Choose paint or stain and update their color.
Replace the Hardware
The handles and knobs on them. Depending on the size of your kitchen, this costs up to $250 if you do it yourself. Expect to spend about $1,000 if you hire a paint crew.
Replace the Countertops
Choose something that will last long, looks good, and provides a complement to the cabinets. Cement, butcher block, and ceramic all make affordable choices. You’ll spend about $1,000 on materials plus you pay for labor. If you have the money to spend, consider marble countertops.
Replace Your Flooring
Choose laminate or ceramic tile. These tough surfaces look great over the long term, plus they go well with most cabinetry. You can get an appearance of hardwood with a laminate without the expense or the next-level care and maintenance. With ceramic tile, you can easily match it to a backsplash you put in later. Expect to pay about $2,000 for your flooring and a bit more for installation.
Update Your Sinks
A double sink makes it a more useful kitchen. It provides space for one person to wash dishes while another rinse and dries. It provides two spaces for food prep. You double the utility of the kitchen. If you have an island, and most larger kitchens do, add a sink to the island. Expect to spend about $1,500.
The Food Preparation Area
As you near your re-sale time or they wear out, replace your appliances. You can spike your value here because you will update the most important part of the kitchen – the food preparation aspect. This improvement costs the most. Expect to pay about $7,000 to $10,000. You need to update your refrigerator/freezer, oven, stove, microwave, and dishwasher. Make everything match in color and match them to your cabinetry and flooring.
Put in the little touches that make a house a home. Install a backsplash. Make the tiles match the flooring. Trim the area around the microwave using the same tile.
You are finished and you added about $10,000 to the re-sale value of your home. You updated the look and the utility of your kitchen. That helps future homeowners. You can apply this kitchen example to any room and update it in stages. Make each stage a finite improvement so your home does not appear to be in a constant state of remodeling. Pick things you can do from start to finish in a weekend if you DIY it or a week if you hire a professional.
You can update a bathroom in the same manner. Wallpaper the living room or redo its floors. Add wainscoting to the dining room. Panel the hallway. All of these small projects add equity and raise the apparent value of your home. You can enjoy them as you complete them, plus you add to the home value.
Update for Energy Efficiency
Today, many new builds boast energy efficiency that results in zero utility bills each month. If you gasp at the thought, you should know that you can remodel your home to do just this. You do not have to have a new home to create a zero-cost home.
Your first step is to update your appliances. Choose energy-efficient appliances such as a water heater, washer, and dryer. You can choose a solar-powered water heater and never pay for heating your water. Your solar panels will generate all the energy the water heater requires.
Since you already insulated your attic in the above step to add instant equity, your next insulation goes in the basement. Okay, if you do not have a basement, you get to skip this part. You can stop there, but if you really want to grow the equity in your home, you can convert it to solar or wind power. Wind only works in certain parts of the country, but you can install solar anywhere.
You could spend up to $20,000 on a roof installation. The cost depends on the amount of energy you need to generate each day to run the items in your home. If you hire a firm to install it for you, they can conduct an energy audit before starting to determine the amount of energy you need to generate. Some people who own tiny homes can get away with a small installation that costs between $1,000 to $2,000. Larger homes tend toward the high end of the cost estimate.
Keeping Up With the Joneses
The old saying about keeping up with the Joneses applies to building equity. You also build equity over time so long as your neighborhood does well. If you are the only person in your neighborhood taking care of your home, then you won’t see as large an equity increase. If the whole neighborhood takes care of their houses though and builds nice curb appeal, your home equity grows.
If your neighbors make home updates, you should, too. If they add a deck, sure you might seem like a copycat, but you should add one, too. Here’s why.
Home Appraiser
At the time of your home's sale, your home gets appraised by a professional appraiser. This person provides an objective, fact-based estimate of the value of your home based upon specific criteria. They compare your home to other homes in the same area that sold in the past six months. If your home does not have the same upgrades as those other homes, referred to in the real estate business as comp homes or comparable homes, it gets valued lower.
So, to raise the equity in your home, when your neighbors make a home improvement, compliment them on it and then say, “What a great idea! I think I will do that, too.” Put that deck on the back! Have a porch added to the front. Redo the home office to upgrade it for high-speed data and video conferencing. This gets you a higher house appraisal.
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Why You Want Equity
Equity matters because you can use it to obtain money. More than just being an increase in what you can sell your home for, at re-sale, you can take out a loan or line of credit based upon your equity.
Aha!
Home Equity Line of Credit
You have probably seen commercials for a home equity line of credit. This works a bit like a credit card, but it is based on how much equity you have in your home.
You can borrow a percentage of your available equity, typically about 70 to 80 percent. That means if you have $10,000 in equity, you could borrow about $8,000. Ahem. That would nicely pay for some of the larger upgrades and most people who take out these loans use them in that way.
You get to draw on the line of credit a little bit at a time. You can use $2,000 of it in July, then $3,000 in December. You can wait a year before you spend the rest of it. Banks refer to this as the draw period and it can range from five to 15 years.
This useful method helps many homeowners update their houses and improve their living quarters. They then make up the investment at the home sale.
You pay interest-only payments to the bank during the draw period, but once you have exhausted all of the HELOC funds, you begin repaying the loan. This rebuilds the full equity in your home.
So, you built equity, then borrowed against it. You used the money to improve your home, which increased the equity in it, probably back to your pre-loan value, maybe a little more than that. You repay the loan while you finish paying off your mortgage. This increases your home’s equity more. Once you pay off your mortgage, you own all 100 percent equity in your home, plus it has a higher value than when you purchased it.
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