Today I am going to talk to you about what home owner equity is, why it's important, and the 3 ways you can create equity in your home!
What is Home Equity?
Equity is the difference between the value of a property and what is owed on the mortgage. In terms of sellling, equity is the amount of money a homeowner receives when he sells the property and pays off the mortgage. So if the homeowner wants more money, building equity is a way to go.
You will be astonished about the distribution of wealth in this country and how much of YOUR Net Worth / Wealth is in your Home Equity. The top 20% of the population controls 80% of the wealth of this country with a minimum Net Worth of over $16 Million dollars. Of the 80% of us that are left we have a mean Net Worth of about $200,000.
50%-60% of our Net Worth is in our Home Equity.
Throughout every stage of our lives this Equity is the key to our well being.
There are three ways home owners build equity, 2 of which you control and one you benefit from without any work or expense to you! These are:
- Paying down your mortgage
- Home Improvements
- Home appreciation
Let's take a look more closely!
Paying Down Your Mortgage
The first way to build equity is to pay down principal on your mortgage. If your equity is the value of your home minus the mortgage amount, reducing the mortgage obviously increases the equity!
The second way to increase equity is by home improvement. Not all Home improvements will increase the value of your home. They must be things that make a buyer want to pay more for your home – more than it cost you to make the improvement. We will discuss what improvements are profitable and what aren’t in a later video
The third way to build equity is by appreciation. Past few years of recession have left a bad taste about appreciation especially for those that had to sell for less than they paid or even those who sold for only slightly more than they paid winding up a small appreciation or even with negative appreciation. But that has to be looked at as a short term effect but those that are building equity as source of future wealth can base their expectations on the historical 3-5% that residential real estate has appreciated through all the economic cycles in the last 20 years INCLUDING THESE LAST 6 YEARS OF RECESSION. A $200,000 home at 3% appreciation over the 30 year life of your mortgage would leave you a home equity of $500,000 that you could sell tax free!
These are just the basics of home equity – our next video will focus on strategies to maximize building home equity wealth and the many profitable ways to use that equity