As you’re buying/selling a home, you may hear the advice to build equity. But what does this mean?
First, let’s go over the term equity.
Equity is the difference between your property’s fair market value (FMV) and your outstanding balance on your mortgage. Home equity appreciates when you make mortgage payments or when your home’s value increases.
Now that we know what it means, how can you boost it? Here are several ways:
Increase your down payment. As previously said, the more you shrink the difference between your home’s FMV and outstanding balance, the better your equity.
Similarly, contribute more to your mortgage payments.
Increase your home’s value by investing in remodels and upgrades.
Refinance to a shorter loan. This helps because you’re going to be contributing more to your mortgage (and shrink that difference). Your payments can increase significantly, so make sure you have room in your budget before doing this.
The option anyone can do is to wait for your home’s value to increase. Housing markets change over time, and when demand increases, in most cases your home’s value does too.
Questions about equity? I’m standing by.