My dad’s advice when I graduated from college was to buy a home and start building equity as soon as I could. Ted & I took that to heart: We bought a small, dated Greenfield home in our early 20s so we could start paying down principal and increase value with thoughtful projects to help it feel more updated.
Our Greenfield home, before:
Our Greenfield home, after:
About three years after we bought our first home, a once-in-a-career promotion opportunity came up, but it required a one-to-three-year transfer to New Jersey. Knowing we wouldn’t be there for long, Ted and I wrote out spreadsheets and analyzed tons of variables before we decided to skip renting and buy a fixer-upper to build equity. It was a lot of work filled with big lessons and days we wished we could have passed our problems off onto a landlord, but the final result was incredible: We managed to increase the value of our home by 45%!
Thanks to that decision, we were able to use our equity to buy our next home—one that didn’t need so many design decisions on my part (or so much back-breaking labor on Ted’s part)!
Properly understanding what home equity is can make you a smarter homeowner and help you make sound financial decisions in the future.
What Is Home Equity?
In simplest terms, home equity is the amount of money that is yours in your home, based on your mortgage balance and the value of your home.
Let’s say you have a recently renovated, three-bedroom, two-story home in Greenfield worth $250,000 and you still owe $100,000 on your mortgage. In this scenario, you’d have $150,000 of equity in your home.
Your equity can fluctuate over time. If your home’s value decreases, so does your equity. If your home’s value increases, your equity does as well. Let’s say the value of your home increases to $300,000 after a renewed demand for homes in Greenfield. If you still owed $100,000, your equity would jump from $150,000 to $200,000—just because of shifts in the market.
Why Your Home Equity Matters
Your equity can be an incredible financial tool. If you’ve completely paid off the mortgage on your $250,000 home, you can leverage your ownership in a variety of ways.
You can use your home equity to:
Assist in buying a new home. You can use equity of any amount in a variety of ways. Even if you only have $50,000 in equity, you could—under the right conditions—use that entire $50,000 on a down payment in a larger, more expensive home and actually pay a smaller mortgage than in your current home.
Borrow. You can borrow against your home equity for a home equity loan or a home equity line of credit (HELOC). You can use the money for anything you’d like, from education to home improvements, to consolidating debts. Since you’re using your home as collateral, typically the interest rate is much lower than credit cards or another unsecured loan.
Increase your income during retirement. Your home equity can also assist in a reverse mortgage, a mortgage where a bank or another entity buys equity over time. If you own your home outright, this could turn into hundreds of dollars every month during your retirement.
How to Increase Your Home Equity
Here are a few ways you can build your home equity over time:
Home Equity Strategy One: Use a large down payment
You can build home equity by making a large down payment when you buy your home. Let’s say you buy that house in Greenfield for $250,000 and put $25,000 down. You’d have $25,000 equity the day you move in. A higher down payment also typically means you’ll get a lower interest rate, which can help you build equity even faster as you pay off your loan.
Home Equity Strategy Two: Pay Off Your Mortgage Faster
The more you chip away at your mortgage, the greater your home equity. You can also save years on your mortgage payments with just a small change. On a $200,000 house with a 30 year loan at 3.5% interest, paying an extra $50/month will increase your equity by $600/year, save you over $12,000 on interest over the life of the loan, and you’ll pay off your loan about 2.5 years ahead of schedule!
Home Equity Strategy Three: Stay in Place
The longer you live in your home, the more you’ll pay on your mortgage—and the more equity you’ll earn.
There’s another advantage to staying in place: You can benefit from gradual changes in the market that increase the value of your home. Homes in certain Pittsburgh neighborhoods, like Milvalle and Sharpsburg, are forecasted to increase in value over the next few years simply because the neighborhoods and businesses have invested in those areas. As the neighborhood grows, local homes will increase in value.
Home Equity Strategy Four: Renovate
For us, renovating our homes has been a powerful tool to build equity, but the rewards have not come without risk, thoughtful planning, and an investment of time and money. When you build equity through renovations we call this “forced equity,” because you are controlling the outcome. In our renovations, we made all of our decisions based on which projects added the most value, and were careful not to over-invest on finishes we preferred, but may not offer the highest return on investment. The more you do yourself, the more equity you’ll retain, but be careful not to tackle projects you can’t finish well, because it can be even more expensive to out-source once you’ve already made a mess of things!
We have quite a few lessons we have learned from our journey, from the time I wanted to paint our kitchen purple, to the day Ted realized we really, really needed professional help finishing kitchen drywall! Here are a few before and after pictures from our adventures in New Jersey.
Before: When we opened this oven, the whole door fell off! We ran into a number of plumbing surprises in the kitchen, but it turned out great in the end, as you can see in the After:
This empty attic space was full of potential—perfect for building forced equity. Ted hauled up and installed hundreds of pieces of knotty pine, and we had a professional electrician add heat and outlets. In the end, this added the most square footage, and value, to our home.
We remain big believers in the lesson my dad taught us early on: building equity in your home can be life-changing, and we love helping people understand their options and reach their goals. If you’d like to learn more about building home equity, contact us! Email us at theblocks@theblocksintheburgh.com or call at 412.926.7976.
Cheers,
Julie & Ted