Understanding Equity: Your Home As A Financial Asset

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Understanding Equity: Your Home As A Financial Asset

1 October 2014
 Categories: Real Estate, Articles

Even though the cash flow that moves through your bank account is never standing still, you have a lot of untapped assets that greatly increase the value of your standard of living. One of the biggest assets you have is your land and your house--even if you're still paying it off. There are certain ways you can use your home equity to your advantage, especially if you suddenly become financially strapped due to job loss or a medical emergency. Once you understand how important your equity is, you can put in the effort to raise it as much as possible. 

What Is Equity?

In short, most people don't simply go out and pay for a house in cash. It's simply too much money for someone to put up all at once. Instead, you share the asset with the lender, gradually paying them back (with interest) in the form of monthly mortgage payments.

Every time you make your monthly mortgage payment, the bank or lender owns a little less of your house, and you own a little more. The part of your house that you do own, or rather, the total value of your house minus what you still owe, is your equity.

How Can Equity Help?

Even though this value is not tangible, a high home equity is desirable for a number of reasons, including:

  1. Getting approved for needed credit. Sometimes, you need cash for medical bills, home improvement projects, or other large-scale financial endeavors, including start up costs for a business or even education. If you own a substantial amount of your home, you can use this equity as collateral to take out low-interest loans for other areas of your life. Basically, it gives you a rock-solid base for obtaining credit from other lenders.
  2. It's a built in nest egg. You can actually cash in on your mortgage payments later in life. Think of your home equity as a giant savings account. After you have paid a certain amount into your home, you can get a certain amount back when you retire or downsize to a smaller home. Suddenly, you'll have tens of thousands of dollars in the bank after you sell your house.

How Can Equity Be Increased?

Besides paying your mortgage every month, you can do a few things to increase the equity of your home. If you can raise the value of a house, you increase the difference between your home value and how much you owe. This is almost like creating something from nothing. You can increase equity by:

  • making home improvements. Some renovations have astonishing market returns. For example, a new floor can have an return of almost 200%. When you make these investments in your home, the value goes up. You should get a higher price at the sale than you paid in the first place.
  • making a larger down payment. Scraping together 10% can be hard enough, but if you can, try to scrape together more. The more money you can pay down reduces both the interest on your loan and the monthly payment. It also means you have more equity out of the starting gate, which means you will own more of your house in a much shorter time period. 
  • choosing to buy in a high-demand area, or an up-and-coming area. Sometimes, just the location of your house can add value. If employment is booming, or a new school is being built, these are the places to buy. In a few years, the value of your house could jump exponentially, giving you a great return on your equity when you sell your house. 

However, just like you can gain equity, you can also lose it if you are not careful. Try to keep the value of your property high by choosing good neighborhoods, keeping up the curb appeal, and staying on top of regular maintenance. 

Your home equity can be your biggest asset in life. You can click for more information and learn how to make it a priority in your investments, and see the returns roll in.