Real Estate Investing

There are several ways to increase your home equity, which is essentially the difference between the mortgage balance and the home’s current market value. This may be a slightly more difficult task in some housing markets today as property values plummet. Simultaneously, interest rates are skyrocketing, meaning less money is going toward mortgage principal.

Building equity is a worthy goal. Not only can it help you pocket more come resell time, but you can also take out a home equity loan or home equity line of credit, also known as a HELOC. Banks.com mortgages blogger Miranda Marquit has also detailed an interesting, albeit seemingly risky, way to pay off your mortgage faster with a HELOC. Borrowing against home equity is risky because, for the undisciplined spender, it can be easy for this plan to go awry and head toward foreclosure.

The following are some ways to build home equity, for those who are financially able to do so at this time:

Higher Downpayment: Making a larger downpayment up front benefits a homeowner for two reasons. Obviously, it instantly builds equity right from the start. Secondly, that is the homeowner’s hard-earned money in the bank, so it has the psychological effect of discouraging the homeowner from borrowing against their home equity if times get tight. Home equity loans for cash have gone the way of the dinosaur, anyway. Those are increasingly difficult to find as lenders tighten their standards in response to the subprime lending fallout. As a side note, a downpayment of 20 percent or more will sidestep the cost of private mortgage insurance. For those looking to buy a home now, this may be the easiest way to build home equity under current conditions because property values are at record lows.

Pay More Toward Principal: This was considerably easier when interest rates were lower. However, homeowners can control their interest rates by cutting down the principal. The less principal balance on the loan, the lower the interest charges. A few lenders may refuse to allow extra payments toward principal, so this is one thing to inquire about up front.

Shorter mortgage term: Shorter mortgages mean faster payment of principal, less interest charges and faster build-up of home equity. This can also lower your interest rate substantially, so try to lock in a fixed rate. Some homeowners with 30-year terms may even want to consider refinancing to a shorter term loan.

Home improvements: This is a great way to make your home more enjoyable and build equity at the same time. It may be something as simple as painting or having new carpet laid, or more complex tasks like adding on a deck or front porch. The home improvements with the greatest return on investment have traditionally been kitchen and bathroom renovations. Analyze the return on investment you could get for each individual project before you begin. Also analyze how much you want to spend, which is largely dependent on how long you expect to remain in the house. Those planning to remain in the house for a long time and possibly even pass it down through the generations will probably want to spend more on a kitchen renovation than someone looking to sell soon.

Another important consideration when mulling over home improvement projects is the neighborhood’s price ceiling. You could get more looks at your home than any other home for sale on your street with something as simple as adding a full bath when all the neighbors have one or one and a half baths. This is called a selling point. Something like finishing out the attic to increase your square footage by 800 to 1,000 could be bad if your home is already the largest on the street. Then you’re looking at a liability, something that could hurt you when you list the property on the market.

A classic example of this is an in-ground swimming pool install when nobody else on the street has a swimming pool. Things like swimming pools and greater square footage can seemingly justify a higher asking price. However, that attracts a higher-end consumer with more money. That homebuyer might not want to live in your neighborhood. They may be looking for a different element, where everybody has swimming pools, the homes are generally larger and the median household income is higher. So when planning out a home improvement project, remember that there are other factors out of your control determining how much return on investment you can expect. Reasonable remodels of the bath and kitchen are generally a very safe bet.