How to build home equity
Now that you have a better idea of what home equity is, the next step is to determine how much equity you have and to learn how to build on it. With that in mind, we've brought you three strategies that you can use for building equity. Read them over to get clear on the ways in which you can raise the value of your biggest asset as a homeowner.
Pay down your mortgage
The first and most traditional way that you can gain equity in your home is to pay down your mortgage balance. While you'll gain some equity each time you make your monthly payment, you can help speed up the process by making an extra payment. You can either do this whenever you have an extra windfall or on a schedule. For example, you could plan to make a biweekly payment instead of just making one payment towards your loan balance each month.
Increase the home's value
Next, you can make improvements to increase your home's home's market value. This is the method most often used by fix-and-flip investors. Instead of paying down their home loan, they put their money into renovations that will likely increase the current market value of the property when they're ready to put it up for sale. If they can sell it for a higher price than they originally purchased it for, they can keep the difference as a profit, less the cost of renovations.
Wait for appreciation
Lastly, you can wait for appreciation to help you build equity, which is most often the route chosen by buy-and-hold investors. Traditionally, if an area improves over time, home values will rise accordingly. To that end, investors will often buy homes in up-and-coming neighborhoods, rent them out to tenants, and then sell the properties for a profit when the area has gentrified in a few years.
How to utilize your home's equity
Once you know how to build equity, the final step in this process is to learn how to use it to your advantage. Truthfully, the biggest benefit of real estate investing is that you can leverage the equity you've built up in a property in order to fund other costs. However, it's important to note that there are a couple of different ways to make this happen. We've listed them for you below:
Do a cash-out refinance
If you're confident that you can get a good interest rate, you may want to consider doing a cash-out refinance. With this type of refinance, you're able to borrow more money than you currently owe on your home loan, and the difference is given to you in cash. You can then use that money however you see fit, including as the down payment for another investment property or to cover the cost of renovations that will increase your home's market value.
Get a home equity loan
At its core, a home equity loan is essentially a second mortgage. With this type of loan, you borrow against the equity that you build up in your home, and you receive the money in a single lump sum. Since home equity loans typically use the property as collateral, homeowners are often given a lower interest rate than they would receive with a personal loan of the same size.
Open a home equity line of credit
Meanwhile, a home equity line of credit functions more like a credit card. With this financial product, you're typically given a certain amount of time where you can borrow against your home's equity as needed. During that time, you usually only have to make an interest payment on what you've borrowed. Then, once the borrowing period is over, you'll be expected to make monthly payments on both the interest and principal balance.
The bottom line
For real estate investors, home equity is an extremely important concept to understand. After all, leveraging the equity you build up in the property is how you make a profit. In light of that, feel free to use this post as a guide to understand the ways in which you can build equity and use it to your advantage. Armed with this knowledge, you should have a much clearer idea of how to go about building equity in your next investment property.