Home equity…Everybody wants it, but what exactly is it, and how do you get it?
Equity represents the degree of ownership an individual or entity has in an asset after subtracting any debts against the asset. To say someone shares equity in a company means they would share in any assets remaining after all debts are accounted for.
For example, if your business has sold $500,000 worth of product this year, but you have rent, operating expenses, and a business loan payment totaling $400,000 for the year, you have $100,000 of equity in your business. Equity changes as the value of your assets and debts change.
Home equity works the same way. When you take out a mortgage to purchase a home, your home is collateral on the mortgage loan, so the outstanding mortgage principal must be deducted from the value of the home to determine your home equity.
In most cases, you make a down payment when you purchase your home. That down payment is your initial home equity. If you pay a 20% down payment on a $200,000 home, you have $40,000 equity when you close on your purchase.
As time goes on and you continue to pay down your mortgage principal, your equity grows. Usually, the longer your own your home, the more equity you gain because you are paying down your mortgage. However, any debts you take on using your home value as collateral, such as a second mortgage or home equity line of credit (HELOC,) decrease your home equity.
The changing real estate market also influences your equity. If you paid $200,000 for your home, and two years later the homes in your neighborhood start selling in the $400,000 range, your theoretical equity increases. (Theoretical because you don’t realize your home equity until you sell your home and pay off all debts against it.) You can also lose equity if the market takes a dive but be patient and it should recover in time.
Equity also grows if you make improvements on your home that increase its value. Let’s say you add a swimming pool and all new appliances. You have increased the value of the home. Your equity doesn’t increase by the amount your spent on the improvements, but on the value you get upon resale. This is an important point when considering making improvements prior to putting your home on the market, and one that is often misunderstood.
Let’s say Joe spends $50,000 on upgrades to his home. He might tell his neighbor, “I have $50,000 in my home,” but when he goes to sell, the current market dictates how much he will actually get in return. If Joe ends up selling for $40,000 more than he originally paid, his $50,000 investment got him $40,000 in home equity.
Some things you can do to increase your home equity include:
1) Make a large down payment when you purchase your home. The more cash you put down, the more equity you begin with.
2) Make increased or extra payments on your mortgage principal. Adding to the principal portion only on your monthly payments, or making extra payments when you are able, helps chip away at your outstanding debt.
3) Be smart when making home improvements. Not all improvements build equity. Some improvements may be personal preferences that don’t necessarily add value for resale. Improvements such as a new HVAC system, new appliances, or a new roof are usually more reliable investments than a fountain in the front yard or surround sound speakers throughout the house.
4) Don’t borrow against your home equity unless you must. Home equity is often a homeowner’s biggest asset, and can help to build your retirement nest egg, but it can also come in handy if life throws you a curve ball and you need to borrow against it for an unforeseen emergency. Be careful not to borrow against your equity for frivolous purposes, so it will be there if you really need it.
5) Sell when the market is favorable. If you are counting on your home equity to help finance your next home, pay for your children’s education, or add to your retirement funds, try to sell during a seller’s market when inventory is needed in your area.
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Should you price your home in line with the market or bump it up a little “𝒿𝓊𝓈𝓉 𝓉𝑜 𝓈𝑒𝑒 𝓌𝒽𝒶𝓉 𝒽𝒶𝓅𝓅𝑒𝓃𝓈?” It’s a question I get all the time. Here’s my no-nonsense answer: Overpricing your home (even by a few thousand) is the #1 way to sabotage your chances of getting top dollar for your home. Buyer agents know what your home is worth and if a home is overpriced they’re going to say so. A home priced correctly will ALWAYS generate more interest and sell faster. When pricing your home, an experienced agent who knows our area is your biggest ally. He or she can gather data and help you analyze comps, location, size, age, condition, updates, and other factors that point to a price that will strike the right balance between current market conditions and the features that make your home attractive for buyers. Alright, savvy sellers! Shoot me a message if I can help you or someone you know with any other real estate questions. I’m here to serve you! You can also submit you information HERE to get a FREE Home Home Evaluation!
Feeling shaky about your interior design mojo but want to give it a go? I’ve got just the tool to get you started — a 𝓂𝑜𝑜𝒹 𝒷𝑜𝒶𝓇𝒹.
A 𝓂𝑜𝑜𝒹 𝒷𝑜𝒶𝓇𝒹s a visual depiction of ideas for your design project. Consider it a collage of images that show the color scheme, materials, vibe, or theme you’re after. As you get started, you’ll want to include these elements in your board: -Overall theme, style, or feel (mid-century modern, shabby chic, industrial, etc.) -Flooring -Tiles -Cabinets -Hardware -Light Fixtures -Paint -Faucets -Sinks -Rugs -Furniture -Accessories
Pinterest is my go-to for creating mood boards. Just start pinning rooms, color schemes, furniture, and accessories that you like. Once you notice a trend in what you’re pinning, zero in and start shopping!
I’m currently working on a timeless gray and white color scheme for an upcoming listing. Tied together with time-proven elements merged with the best of current design. These neutral colorings will serve as the perfect backdrop for any décor and personality therefore making it more appealing to buyers. Need a little more interior design hand-holding? Message me – I’d love to refer you to a few of my favorite local designers & contractors!
Rose Reid & Benchmark Real Estate Group, Inc. specialize in helping first-time home buyers like you find their dream property in Longwood.
Before you start searching for homes online, it’s important to take the first step to house shopping: Getting pre-approved for a mortgage.
Your pre-approval will tell you what you can afford and what your monthly payment will be, so it’s important to determine this before you start searching for your new home.
Pre-approval is good for about 30-90 days, so once you’re ready, take these first 3 steps to get it done.
Contact me, and I’ll send over a list of lenders I know and trust.
Look over the list, check out online reviews, and ask friends and family for referrals.
Email 2-3 lenders you like or let me introduce you over email.
Once you’ve got your pre-approval letter in hand, it’s time to start the search!
Before we hop into the home search, I like to advise my clients to create a “Needs” list and a “Wants” list. This will help us to really focus on the things that are most important in your future home.
Needs are the non-negotiable features; the features you simply must have in your next home. Wants are the ones you’d like to have, but you can add or change down the road. Remember, you can’t change the lot or the location so make sure you love both.
Once you’ve established what you’re looking for, I will set you up on a search so you can receive an email the second a home that fits your criteria goes live. If you have any questions about a property, send me the information and I will find out for you. Send me listings you like and I can get more information and set up showings on your behalf.
After touring houses and choosing the one you love, it’s time to make an offer. To do this, you’ll need your pre-approval letter or proof of funds. You’ll also need to make an escrow deposit of at least 1-2% of the purchase price. This will go towards your closing costs at closing.
Have more questions about buying a home or what happens after making an offer? Reach out to me today!