Whether you're looking to renovate your home, invest or pay off something large, home equity can be a valuable resource when it's used correctly.
So… How is it calculated?
Let’s start from the beginning... Your purchase a property. A portion, or all of the property is purchased by means of a mortgage. Now, the lending institution has an interest in the home until the loan obligation has been met. Home equity is the portion of a home's current value that the owner actually owns free and clear. If a homeowner purchases a home for $100,000, with a 20% down payment and covers the remaining $80,000 with a mortgage, the owner has equity of $20,000 in the house.
What about market fluctuations?
Keep in mind that as the market value of your property can go up or down, so too can the equity you have in it. Nowadays, we see it less often, but think back to old Uncle Joe who bought a piece of land 30 odd years ago in Leederville for $10,000 and half a goat. He's got some serious equity in the land if he's held onto it!
How to improve your equity
1. Buy with a large deposit.
The more deposit you have, the more equity you will start off, and that puts you ahead from the get-go.
2. Buyer Smart
Look for areas that are in demand or have shown steady growth. Traditionally, inner city suburbs and suburbs along the coast are usually a safe bet!
Another smart move (but comes with risk) is picking a suburb with potential growth on the horizon – think: an upcoming train line, large scale infrastructure planning etc that could see demand for the arear rise.
3. Improve the property
Some remodelling and improvement projects boost a home’s equity. But not all do.
Don’t renovate for the sake of it. Major improvement in bathrooms and kitchens can add serious value to your home, but aesthetic changes may just be time and money wasted.
4. Pay more on your mortgage
Duh… seems simple, right? But most never consider to do this. If you decide go down this path, make sure the extra money is applied to your mortgage principal.