Building your home equity is one of the best ways to increase your family’s overall wealth while still being able to enjoy the money you have. Whether you want to improve the value of your primary residence or a second income property, there are a lot of ways to increase the amount of equity you have in a property, even if you only have a small amount of money to spend.
What is home equity?
Home equity is determined by subtracting the total value of a property from the amount that is still owed on the mortgage. Essentially, it’s the amount of profit that could be made before fees if a person had to sell their home (ignoring taxes, fees, insurance, etc).
Why Should I Increase My Home Equity?
Home equity can be a valuable source of funding for everything from college tuition to an emergency fund. When you access your home equity through a cash-out refinance, you’ll be able to borrow money at a lower fixed interest rate than those offered by most personal loans.
How to Build Equity
Improving the equity in your home can be done through three different methods. Making regular monthly payments on a mortgage, allowing the real estate market to appreciate, and making home improvements can all help to improve home equity.
Paying down your mortgage
The more you pay down the principal on your mortgage, the more equity you will build. In fact, every mortgage payment you make will help to increase your equity. Because of this, there are a lot of methods for people who want to pay off their mortgage faster. Making biweekly mortgage payments is very popular, for example.
Natural market inflation
Over a long enough period of time, real estate tends to increase in value. That means that homeowners are often surprised to learn that they have a lot more equity in their property than they originally thought. As home prices increase, the overall equity in a property increases. This method of improving property value, however, isn’t the most reliable. Real estate markets can fluctuate wildly over the short term, and it can be very difficult to determine when home prices drop and when they will rise again.
The last housing crisis showed that a lot of homeowners who were relying on this as their sole method of improving their home equity were severely disappointed. Many of them who had taken out exotic loan products with variable interest rates under the assumption that they didn’t need to improve their properties or pay off principal discovered that they had to come up with extra money to make loan payments once interest rates started rising.
There are a number of improvements that homeowners can make that will increase the overall value of their homes. There is a wide range of these home improvement projects, including projects that cost just a few dollars to projects that can cost six figures or more.
What Improvements Will Increase My Home Equity?
Generally, improvements that are relatively small will get you the most return on your investment. As you decide on what to improve, consider property values in your neighborhood. It rarely makes sense to spend so much that your home has more money in renovations than what most people owe on their current mortgage.
If you’re looking for ways to improve the value of your home, try these suggestions.
Few people think about the outside of their home when they’re looking for ways to increase their home’s equity, but the curb appeal of a property is one of the first things that potential buyers see. It’s not uncommon for a real estate agent to tell their clients that if they can only improve a few things around their house, to focus on the outside.
In fact, most landscaping pays back 106 percent or more of what was spent on the project. Landscaping can also be one of the cheapest home improvements since a lot of landscaping can simply consist of trimming back bushes and pulling weeds. In fact, this project relies a lot more on “sweat equity” than on having more cash to invest. Landscaping doesn’t require your family to move out of the home or make other living arrangements and it can often be done in sections until more money becomes available.
Small bathroom remodels
Bathroom remodels that cost less than $10,000 can often return that much or more when it comes time to sell a home. This level of remodeling usually includes simple updates to the tub and sink, but it does not involve removal or replacement of these items. Think about repainting or putting up wallpaper, fixing leaking faucets and refinishing the fronts of cabinetry instead of replacing them.
Often, a small bathroom refresh can return many times its cost when it comes to determining your home value.
Building an additional bedroom can cost between $10,000 and $30,000, and it can return that much or more in terms of home equity. It is important to make sure that the addition matches the rest of the house, however. Hiring an architect to ensure that it is done correctly will be worth the investment.
Updating light fixtures
The lighting in a home can set the tone for the entire house. Fortunately, replacing outdated chandeliers and ceiling lights are relatively easy and cheap. How much additional cash you choose to invest in a project like this is up to you.
Creating an in-law suite
If you have the available funds, consider going a step further and build an in-law suite. With so many older Americans wanting to age at home, these suites are becoming very popular among potential buyers, meaning that there is a huge increase in demand for homes like this. These areas usually include a bathroom, small sitting area and a kitchenette. Depending on how your suite is constructed, it could potentially raise the value of your home by $50,000 or more.
Adding an outdoor room
Screen rooms, Florida rooms and enclosed lanais are all becoming relatively popular. Most cost less than $20,000 to install, and they’re very popular among home buyers who are looking for additional space to entertain that is still temperature controlled. Focus on creating a space with a lot of natural light.
What Improvements Will not Increase My Equity?
There are a number of home improvements that do very little to improve home value, and in many cases they can actually decrease it. As you decide what to renovate, avoid these common mistakes.
Converting a garage
All too often, homeowners who are looking for a less expensive way to create more space in their home decide to convert their garage into another living room or bedroom.
Unfortunately, eliminating the garage can drop the value of a home and make it extremely difficult to sell. When these renovations are not done professionally, they can be a turn-off to many buyers, who see them as another project that will need to be corrected in the home.
Large bathroom remodels
Bathroom remodels that cost more than $25,000 are typically not worth the effort. All too often, the money is spent increasing space, which doesn’t add a lot of value if the other rooms in the house are small. Either work on decreasing the cost of this renovation, or look for a new home with larger, updated bathrooms.
Large kitchen remodels
While large modern kitchens are in fashion right now, it can be very difficult to get back more than 60 percent of what you spend when you sell the home. Often, this is because a lot of the money spent on kitchen renovation goes toward projects that buyers don’t see, such as running extra gas and water lines.
Because of this, major kitchen remodels are often paid for with a lump sum payment received from taking out a home equity loan, rather than done with cash to improve home equity.
Removing a bathroom
Don’t make the mistake of removing a bathroom to make space for a larger kitchen or living area. While this is often touted as a way to save money on a home renovation, the truth is that it often leaves a home with too few bathrooms for the number of people living there. Build an addition to the house or move to a bigger place before spending your money on this kind of project.
Once you start a project, be sure to finish it, even if you have to take out a home equity loan to do it. One of the worst things a homeowner can do is to try to sell a house with a renovation only partially done. A lot of buyers don’t want the hassle of moving into a home that needs immediate work, forcing a seller to dramatically lower the asking price just to get the home sold. Furthermore, many buyers see a partial renovation as a red flag that something went wrong with the house itself, causing the few buyers who express interest to demand extensive home inspections.
What renovations increase home value the most?
Small renovations to the bathroom and kitchen that help to update the property, as well as any improvements that add to a property’s curb appeal will get the biggest return on investment.
What home improvements are tax deductible?
Unless you can claim the home improvements as being necessary for a business, home renovations are generally not tax-deductible. It may be possible to get creative, however, with state tax deductions.
Can I write off home improvements?
In order to write off home improvements, it’s necessary to show that they were done for a business venture.
How much should you spend on new home upgrades?
The home improvements that bring the most return on investment are ones that typically cost less than $15,000. Beyond that, it can be difficult to get back everything that you put into the renovations. Try to avoid borrowing money to pay for renovations.
What home improvements should be done first?
Increasing the curb appeal of a home is always a good place to start. After that, work on small upgrades to the kitchen and bathrooms.
Is property renovation a good investment?
Making improvements to a property is a good investment if the improvements are done correctly. Look for improvements that can be made without opening a new line of credit, and keep your improvements up-to-date and tasteful.
How Can I Access My Home Equity?
Home equity can be used as an emergency fund, a retirement savings plan, a college savings plan, and a lot more. There are two main ways to access the equity in your home, depending on your personal financial situation.
Selling your home
When you sell a property, you have to pay off any liabilities on the property before receiving a check. This usually means paying off the mortgage, as well as any other fees to realtors, and closing costs. Because of this, it is rarely recommended that a person have a lot of equity in a property before taking this option. The fees from buying and selling will eat through tens of thousands of dollars.
Home equity loans
Home equity loans are often the preferred way to access home equity, especially for a primary residence. These loans can take several different forms, including home equity line of credit and cash out refinance loans. These loans allow a person to use your home equity for just about any purpose. Interest rates are usually fairly low, and loan amounts can be for any sum under the total amount of equity in the property.
A home equity loan is often a good way to access funds at a fairly low interest rate. Because the loan is backed up by a tangible asset, a home equity loan is often the most affordable way for a person to access a large amount of funds.
Build equity with home improvements
Building home equity with simple home improvements is not as hard as it may seem. Bottom line is to focus on the small things that most buyers care about and see often — curb appeal, additional space, etc. Whatever route you decide to go, hopefully, you now feel more equipped to build your equity!