Homeownership offers many advantages over renting. You get to make the decisions on what changes to make to your home. With a fixed-rate mortgage, your mortgage payment never changes. Many homeowners receive a tax deduction for the interest paid on their mortgages. And then there’s home equity. What is that? How can you build it? And what can you use it for?
What is Home Equity?
You’ve probably heard the term. But do you actually understand what it means? Basically, equity is the portion of an asset that you actually own. In real estate terms, home equity is what your home is worth minus the balance of your mortgage. So, if you bought a Tulsa home today for $250,000 and put $50,000 down (20%), you automatically have at least $50,000 in equity. Now, let’s say that your home’s value climbs to $350,000 and your balance is $175,000, then your equity increases to $175,000 (50%). On the flip side, if your home’s value decreases, you could end up in a negative equity situation (aka “underwater”). We saw that a lot after the bubble burst in the late 2000s.
How Can I Increase My Equity?
The simplest way to increase your home equity is to continue paying your mortgage payment each month. At the beginning of your loan, the bulk of your payment goes towards interest, with a little of it going toward the principal. But, as time goes on, the amount going towards your principal increases while the amount allocated to interest decreases. You can help this along (and pay your loan off faster) by making additional payments. For instance, instead of making 12 equal payments per year, divide your payment in half and pay that every two weeks. That gives you one extra payment every 12 months. By doing that, you pay off your loan four to five years sooner. The extra payment also means that your equity increases faster.
Another way to increase your equity is to make improvements that increase your home’s value. Update an outdated kitchen or bathroom. Upgrade your finishes. Install smart home features like a smart thermostat, security system, and energy-efficient appliances. Increase your curb appeal. Any upgrades you can make that increase your home’s value also help elevate your home equity faster.
What Can I Use It For?
Another advantage of homeownership is that you can use your equity to your advantage. First, you can take out a home equity loan or second mortgage to consolidate your debt, make improvements to your home, take care of an emergency expense, or even use it towards buying an investment property. Also, when you sell your Tulsa home, you can use that equity towards the down payment on a new home.
When you are ready to start looking for your next Tulsa home, contact me.
