What is equity and how can you build it?
Updated: Jun 21, 2021
Equity is the difference between what you owe on your mortgage and what your home is currently worth.
There are three main ways to build equity in your home:
1. Pay down your mortgage. When you pay your mortgage payments each month, you reduce the amount you owe on the home and the amount of equity you have in your home will increase. Your down payment is also equity. For example, if you buy a home for $200,000 and put down a $20,000 down payment, you immediately have $20,000 of equity in the home.
2. Stay in your home 5 years or more. You build equity as home values in your area rise. While real estate is not guaranteed to rise in value, the odds increase the longer you own your home because real estate values have always gone up over the long run. Always.
For example, you buy a home for $200,000. Home values rise in your neighborhood. When you decide to sell, let's say your home is worth $250,000. You earned $50,000 in equity simply because home values rose in your area. Combine that with number 1 above, and you have a great deal of equity that you can use.
3. Renovate and add value. Improvements you make to your home add value. Adding additional square footage, renovating the kitchen, and investing in landscaping all add to the value of your home.
To determine your equity, you need to know the current value of your home. While only a qualified real estate appraiser can give you an official valuation of what your home is worth, an experienced Realtor can give you an estimate of your home's value by running a Comparative Market Analysis. (Read our full article on this topic HERE)