Understanding Home Equity

When it comes to owning a home and making equity, it is important to understand what home equity is. In essence, home equity is the difference between the appraised value of a property and all debts owed against that property. Home equity accrues to the owner of the home after all of the debt obligations, such as a mortgage, have been paid down.

To build equity, payments are made over time to reduce the principal amount of the loan. As the loan amount is reduced and as the real estate market goes up (or down), the amount of equity will change. Therefore, many people strive to increase their equity by making payments beyond what is required.

Additionally, it is important to remember that a home is typically the largest investment people will make in their lifetimes. With a good starting location, a solid plan to build equity, and wise and savvy decision-making, one’s home can become a major asset and financial hedge against economic uncertainty.

How to Build Home Equity

Building home equity involves effectively managing a homeowner’s property. In some cases, homeowners may invest in making improvements to their property in order to increase the consumer’s home equity. For example, remodeling a kitchen or adding a bedroom may increase the value of the property and the consumer’s home equity.

In some cases, it is possible to take out a loan against the home equity that’s built up. Generally, the loan will be given in the form of a home equity line of credit (HELOC), or a loan secured by the equity in the property. It is important to note that taking out a HELOC or loan against your home equity is a form of secured debt, meaning if it’s not paid back, the lender may be able to take ownership of the home.

When it Makes Sense

It is important to remember that building home equity is the right decision for some individuals and the wrong decision for other individuals. For example, homeowners who pay off the loan amount in full will be able to take ownership of their home free and clear.

Additionally, when flipping homes, or short-term investments, building home equity probably isn’t the wisest decision. Unless a real estate investor has a long view towards their investment, it might not make sense to decrease his or her profitable prospects.

Generally, when it comes to building home equity, it is important to consider long-term goals and determine if the decision to build a home equity plan meshes with the current and future goals. Thankfully, there are resources and professionals available to help individuals understand the potential of building home equity.