Buying a home is a strategic move that you can benefit from greatly if you make the right move and commit to projects that are a good return on investment (ROI). When choosing a home you want to make sure that you are selecting an option with the best likelihood of increasing value and will allow you to make modifications (ranging from minor to extreme) that add equity. There are two types of factors that can either positively or negatively affect your home equity; those that you can control and those that you can’t.
What You CAN Control In Regards To Your Equity1
Making payments is the easiest way you can increase your equity over the course of the years. Equity is, after all, the difference of your home value and how much you still owe. For example, if your home is worth $500,000 and you owe $100,000 you have $400,000 in equity. So the more you make payments and the longer you have had your home the more your equity will grow.
Refinancing to a shorter term will allow you to achieve the maximum amount of equity faster. When you do this your monthly payments are likely to go up, so if this doesn’t affect your ability to make payments it can be a great option. You could achieve a similar affect by simply paying a little extra each month depending on your ability to do so. This method allows you to get closer to paying off without having to commit to a higher monthly payment.
Improvements to your home are a great way to add equity to your home when done right. Calculating your return on investment and making choices that won’t become outdated quickly or hard for future owners to design around is the best way to get started.
Below is a list of improvements that are the best options to build equity with the best ROI:
- Updating the plumbing and electrical where needed is a project with an estimated 260% average return on investment. Making these updates will not only add equity to your home, but will make the selling process smoother as you will have less disclosures to tell potential buyers.
- Upgrading your kitchen and bathrooms is a project with an estimated 168% average return on investment. Depending on the state of these two rooms in your home this can either be minor fixes and polishing or a complete remodel but makes the presentation of the home so much more appealing to potential buyers.
- Internal paint at an estimated 148% and external paint at an estimated 76% average return on investment are something to consider if your home is getting a little dreary looking. Lighten up the spaces inside to make them look roomier and add curb appeal to your home with these two projects.
- Yard improvement projects have an estimated 426% average return on investment. Storing equipment out of sight by adding a small shed and having a landscaper add appealing low maintenance shrubbery can add to the appeal and functionality of your home.
- Flooring is a popular choice when it comes to equity building. This can be replacing or cleaning carpets at an estimated 105% average return on investment or replacing/repairing new wood or tile flooring at an estimated 101% return on investment.
What You CAN’T Control In Regards To Your Equity1
The neighborhood that you buy into has the capability of affecting your equity either negatively or positively depending on whether or not it sinks or floats. A neighborhood that becomes dilapidated over the course of years is bound to decrease your equity. The opposite goes for neighborhoods that remain in good shape or get better with age. Make sure that you choose a neighborhood that has a promising future.
Home value is a factor that is controlled by the market. Given the improvement of the market one can assume that your home value will increase over the course of several years, but that has not always been the case. If the market takes a fall after you purchase your home and a life event causes you to have to move you could lose money from your investment. If you’re able to stay put for more than a few years this is likely not going to affect you too badly as you could choose to sell once the market makes a comeback.
If you’re looking for a way to tap into the equity in your home, a reverse mortgage may be able to help. A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration insured loan (FHA). A reverse mortgage enables seniors 62 or older to access a portion of their home’s equity to obtain tax free1 funds without having to make monthly mortgage payments.2
If you’d like to learn more about how a reverse mortgage could help you, please use our Reverse Mortgage Calculator or call us at 800.218.1415.
1 Pogol, G. Building Home Equity: It All Adds Up. Retrieved from: http://library.hsh.com/articles/home-equity/building-home-equity/
2 Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.
3 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.