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The Importance of Home Equity and How You Can Build It

Finance 101

A home is one of the most significant investments you can make in life, and it can also be an extremely valuable asset. When you put money down for the purchase of your home, you will not only be protecting the loan investment, but you will also be establishing the first portion of equity in your home. Having equity is essential to protect you in the event that you need to sell your home. If you have a need to sell your home quickly, and the housing market or your home value has declined, you will have no equity in your home. This could cause your house to be less than you owe on your loan, preventing you from being able to sell.

Another vital reason to build home equity is in the event that you will need to borrow against it in the future. Sometimes life circumstances -- such as high-interest credit card debt, unexpected and expensive medical bills, or large expenses – may require you to borrow against your home. If you have no equity in your home, you will likely be unable to borrow against it to secure these funds. In addition, you may end up paying a significant amount of interest on a higher rate loan.

Whether or not you were able to make a large down payment, there are still ways to build equity in your home in case you will need it for future use. Some of the best ways to increase the equity in your home include:

Making Improvements

Renovating or adding square footage is a great way to not only increase the value of your home, but to also make it best fit your needs. Many major renovations, such as adding rooms, remodeling kitchens, and updating bathrooms, can add a lot to the value of your home. In turn, this could raise your overall equity.

Making Additional Mortgage Payments

Adding payments towards the principal of your home loan may get the balance down quicker, save you on interest, and provide you with increased equity. You can either make payments on the principal when you have additional funds, or you can routinely pay a certain amount of additional principal with your mortgage payment each month.

Choosing a Shorter Mortgage Term

While this is most easily done at the beginning of a loan, changing to a shorter term can also be done through refinancing. However, it is important to also account for the associated closing cost. Choosing to repay your mortgage over a 15-year term instead of the traditional 30 years may pay down the principal of the loan faster, causing your equity to accrue faster, as well. 

Building the equity of your home is not only important to protect your investment, but it may also give you the option to borrow against it if the need arises.

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.