8 Tips For Building Equity In A Home

When people say a house is an investment, they’re usually talking about home equity. Building equity in a home is a good thing since it allows you to increase your wealth without the funds on hand. 

Read on to learn how to build equity in your home and ways you can use it.

What Does It Mean To Build Home Equity?

Home equity is the dollar amount of your home that you own. It’s the difference between the value of your home and the amount of money you owe on your mortgage.

For example, if the value of your home is $200,000 and you owe $150,000, your equity is $50,000.

When you build equity, it means that you increase the difference between your home value and the amount you owe on your mortgage. You can do that by increasing your home’s value or decreasing the amount of money you owe on your mortgage.

For example, if you made extra mortgage payments on your $200,000 home and you now owed $145,000, you would have $55,000 in equity. You increased your equity by $5,000.

Why Is Building Equity Important?

Building equity increases the amount of money homeowners have in their homes that they may be able to use now or in the future. You can borrow from your equity as a loan, invest it, build long-term wealth, or sell your home for more than you owe and keep the difference.

8 Ways To Use Home Equity To Build Wealth

If you want to use your home equity to build wealth, you have options. Let’s take a closer look at some of those ways.

1. Home Improvements

Home improvements and remodeling can help you build wealth using your home equity. Making the right upgrades to your home can mean that you may sell your home for more down the road. For example, wouldn’t it be great to renovate your kitchen and add thousands more to your pocket during the sale?

However, it’s important to choose the most beneficial area(s) of your home to upgrade to maximize your chances of making money on your renovation, such as the following areas of your home:

• Kitchen
• Bathroom
• Primary suite
• Deck
• Siding
• Roofing
• Garage
• Entryway addition
• Curb appeal
• Home exterior
• Outdoor living space 

You may consider a wide range of renovation types, from a gut renovation (stripping a home interior to its basic structure) to a smaller interior demolition or exterior renovation. Read more about home renovation costs for each of these home improvement types.

Another perk: If you take out a home equity loan or line of credit to improve your home, interest you pay on the money you borrow may be tax deductible. “Tax deductible” means that you can subtract this expense from your adjusted gross income to reduce the total amount you owe in taxes.

2. Debt Consolidation

Debt consolidation can also help you build wealth using your home equity. 

What is debt consolidation?

Debt consolidation involves combining your outstanding debt into a new loan, giving you a new loan with one monthly payment. You can take out a home equity loan (also sometimes called a second mortgage) to pay off debt, particularly higher-interest debt.

Here’s how it works: Once your lender closes on your home equity loan, they’ll send you a lump-sum payment. After you receive the money, you can pay off your debt, such as what you might owe on high-interest credit cards, your student loans, or other types of debt. Then, you’ll have just one streamlined payment – hopefully with a lower interest rate — and save money in the long run. 

However, it’s important to note that your home serves as collateral for a home equity loan, meaning that if you don’t make your payments, the lender can foreclose on your home. In addition, if your property value decreases, you might owe more than your home is worth. In addition, you still have debt once you take on a second mortgage – and you might extend the amount of time it takes to pay it off.

3. Invest In Real Estate

When you sell your home, the proceeds from the sale first go toward paying off your mortgage balance, and then you keep the rest of the money or use it to buy another home.

The more equity you have, the more money you’ll make from your home sale. Just remember that you may need to pay a capital gains tax on the money you make from the sale.

4. Increase Your Net Worth

Net worth is what you own (assets) minus what you owe (your liabilities). For example, if all your assets (house, 401(k), savings and checking account balances) total $200,000 and your liabilities (mortgage, credit card debt, student loans) total $150,000, your net worth would be $50,000.

The greater your assets and the lower your liabilities, the higher your net worth. As you pay off your mortgage and build equity, your assets grow and your liabilities shrink, thus increasing your net worth.

5. Develop Your Skills

Those with a bachelor’s degree make 68% more than those with only a high school diploma.

You can earn significantly more per week with a bachelor’s degree ($1,493) compared to a high school diploma ($899), and that amount will increase on average as you achieve master’s and doctoral degrees.

Borrowing from your home could allow you to invest in higher education or certifications. For example, if you’re a nurse and have always dreamed of becoming a nurse practitioner, you could borrow from your home to earn that license.

6. Start or Expand A Business

You can also use your home equity to start or expand a business that will eventually build wealth.

The bulk of U.S. businesses are small, and the 33.2 million small businesses make up 99.9% of that amount. Owning your own business can offer the following benefits:

• Control over your financial future
• Unlimited earning potential
• Building an asset
• Tax benefits
• Create jobs for others
• Personal growth opportunities

7. Diversify Your Investment Portfolio 

You can also build wealth using your home equity by diversifying your investment portfolio, meaning you own a wide variety of investment types.

Diversifying your investment portfolio means owning a wide variety of investment types and asset classes.

For example, you might invest in:

• Stocks (which could be in different countries, industries, company sizes)
• Bonds
• Real estate
• Cryptocurrency 

Diversifying your investment portfolio can reduce your overall risk and volatility.

 8. Invest In Your Children’s Education

Investing in your child’s education can help you build your child’s future wealth using your home equity.

Households in which the most educated member had a bachelor’s degree had a median wealth of $266,600, or about 32 times greater than households in which no member had a high school diploma.

Investing in your child’s education can help put them on a successful financial path for the future.

Using Your Equity: Borrow Your Equity As A Home Equity Loan

You don’t necessarily have to sell your home and move out to use your equity. You could also borrow against the equity in your home through a home equity loan.

This loan acts as a second mortgage that allows you to borrow from your equity and use your home as collateral. That means if you don’t pay the loan back, you could lose your home. When you’re approved for a home equity loan, you receive your money in one lump sum payment.

How To Build Equity In A Home

Trying to figure out how to build equity? We have some ideas.

1. Make a big down payment: If you’re able to make a bigger down payment, you may want to. The bigger your down payment, the more equity you instantly have in the home.
2. Refinance to a shorter loan term: By refinancing to a shorter loan term, you’ll pay the loan off earlier. You’ll also save thousands of dollars on the interest you would’ve paid during the longer term.
3. Pay your mortgage faster: Even if you can’t or don’t want to refinance to a shorter loan term, you can still work toward paying your mortgage off early — just beware of any prepayment penalties. The more you pay down, the more equity you have.
4. Make biweekly payments: Switching to biweekly mortgage payments can add one extra mortgage payment toward your mortgage each year.
5. Get rid of mortgage insurance: Private mortgage insurance (PMI) is what the lender charges you, the borrower, to protect its investment if you don’t pay back your loan.  If you can get rid of PMI, you could apply that extra money to the principal balance of the loan and build more equity faster.
6. Make home improvements: Making updates and adding certain amenities can help increase your home’s value. Energy-efficiency updates can also increase the value of your home. It can also save you money on utilities and could provide a tax credit.
7. Wait for your home’s value to increase: When the market is hot, your home value will naturally increase without you having to do any work.

The Bottom Line: Explore Ways To Use Home Equity To Build Wealth

When you have a good amount of equity in your home, you can unlock several financial and personal benefits. To build equity in your home, you need to work toward paying down your mortgage, increasing your home’s value, or both.

If you’re still renting and are ready to take the step into homeownership, start an application with Rocket Mortgage today.