Making Your Home Equity Work for a Living
written by Credit-HQ ExpertWhen you first buy into a new home, you may have little or no equity in that property. You “own” the property in theory but unless you laid down some percentage of the price of the home as a down payment, the mortgage company actually owns most or all of the home which they slowly sell back to you as you pay your mortgage payments each month.
As you pay down that mortgage over the 30 year life of the loan, more and more of the property belongs to you. That means you gain greater and greater equity in your home. Also as the value of your home goes up due to inflation and normal market appreciation, that value becomes part of your equity as well. So if you bought a home for $100,000 and you paid off $25,000 as you paid your mortgage each month and the value of the home appreciates to $125,000, you end up with $50,000 worth of increased net worth just by paying your bills each month.
Since most people buy a home to live in for most or all of their lives, the goal is to pay off the mortgage before you retire. As such, increasing the real equity you own in your own home is a major part of your retirement planning. There is a lot you can do to strategically use your home equity as part of your financial plan. Let’s talk about a few such strategic maneuvers to use your home equity to its greatest value.
Watching that equity value grow and grow
It makes sense to build equity value by buying a home. You have to live somewhere so why not build equity rather than pay rent so your landlord can build his equity on your payments? One way to see your equity take off is to think about where you buy that home. If you know that a certain area of town will see a lot of growth or that there will be a significant improvement like the addition of a school or recreation facility, buying in that area before the property values skyrocket means easy equity to you. You get the same home but the value goes through the roof just because of what is going on in the city. That is smart home buying.
It is good to know what the equity of your home is especially if you are thinking about selling it. When you sell the home, you “liquidate” the equity which means you turn it into money. But keep in mind that when you sell your home, about 6% of the value of the sale goes to the real estate broker and that comes out of your equity. But if your home has doubled in value, that is still a good transaction for you.
There are some situations where selling a home can actually cost you money. If you did not put any down payment into the purchase of the home, you won’t see any significant equity accumulate as a result of the monthly mortgage payments you make for at least four years. That means if you need to sell before you even have the 6% real estate broker fees to pay, you will have to come up with that money to pay your broker yourself. Selling a home is a complicated operation so you will not be able to do it without a broker. On top of that, if you decided to go with the newest trend in mortgages where you pay the interest on the loan only, you may have zero equity at the time of sale no matter how long you have been paying on it.
There is just one conclusion to draw about handling your mortgage in light of this information. That is that you need to take charge of your mortgage and pay down the principle as well as the interest if you ever hope to accumulate any real equity value in your home and property. It is easy to just make your basic payment each month on your mortgage especially when you are just starting out and that house payment itself is a big bill each month. But if you can structure your budget to make additional payments on the principle each month, you can see the equity part of your loan go up much more quickly. There have been people actually cut down how long they have to pay on their homes by just making an additional principle payment each month.
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