Becoming a homeowner comes with a long, seemingly never-ending list of expenses. From upfront costs like your down payment and closing fees—to unexpected repairs, insurance, taxes, and more—it’s easy to sometimes feel like your home is more of a financial burden than an asset. Show But, that’s not exactly true. Each time you make a payment toward your mortgage’s principal balance, you’re slowly building home equity. This can be a helpful card to have up your sleeve. What is home equity—and why it mattersHome equity is the percentage of your home that you own outright. Calculating your equity is as simple as taking the fair market value of your home, and subtracting what you owe on it. Just remember that it will fluctuate as the market value of your home changes and you make payments toward your mortgage. “Building up home equity can be a great way to financially prepare for retirement or accomplish other long-term financial goals,” says Alex Shekhtman, CEO and founder at LBC Mortgage. There are several ways a home equity loan can help you build long-term wealth. The funds can be reinvested back into your home through home improvement projects that will boost its market value and help you turn a profit if you sell. Or you can use a home equity loan as a down payment on a rental property to jump-start a passive income stream. Other expensive milestones like you or your child’s education can also be financed by a home equity loan. While there are risks involved, a home equity loan can provide an additional, more affordable financing option for life’s more expensive milestones. There are many things you can use home equity to pay for:
There are several reasons why you may decide to take out a home equity loan or HELOC, but the risks still stand. Using this kind of financing can give you access to lower interest rates and more manageable terms, but you could end up owing more money down the line if your home’s value declines. You could also lose your home altogether if you find yourself unable to repay the amount you borrowed. 5 ways to increase your home equitySo, how do you increase your home equity? There are a few approaches you can take.
How long does it take to build equity?Building equity takes time. In fact, a common rule of thumb in the real estate industry known as the five-year rule holds that homeowners should be prepared to keep their homes for a minimum of five years before even considering selling, to recoup their upfront costs and avoid any risk of losing money. The idea behind this rule is that your home will appreciate in value over time and the more equity you’ve built, the less you stand to lose by selling. The exact amount of time it’ll take you to build equity in your home will depend on the strategies you use to get there. If your strategy is to make your monthly mortgage payment and let time do the work for you, it could take a bit longer than someone who is looking to supercharge the process by making extra payments and investing in home improvements to boost their equity. The takeawayYour home is one of the biggest and most important investments you’ll ever make. And getting the most out of that investment means actively working to build and maintain your home equity. Even if you don’t have any plans of selling your home in the future, home equity can give you an added layer of financial protection and stability. Follow Fortune Recommends on Facebook and Twitter. EDITORIAL DISCLOSURE: The advice, opinions, or rankings contained in this article are solely those of the Fortune Recommends™ editorial team. This content has not been reviewed or endorsed by any of our affiliate partners or other third parties. |