When securing financial stability and long-term wealth, buying a home and building equity shouldn't be dismissed. But, in a tight market with fierce competition and limited inventory, buying itself can feel overwhelming. Once you buy a home, how can you build equity to make the most of it? We've got some ideas to help.
Understanding Real Estate Equity
The short answer is that equity is the part of your property that you truly own. The long answer is that equity is the difference between what you owe on your home, your mortgage balance, your property's current market value, or what it will sell for if listed. After you have that number, subtract any outstanding balances for second mortgages or loans secured by your property, like a home equity line of credit.
Ways Your Home Loses Equity
The most common reason a house loses equity is buying when the market is at its peak and then the market drops. While this can happen, it's not a common occurrence. The mortgage industry has learned a lot of lessons since the housing recession in 2008, and today, there are more regulations and stricter requirements for people to buy a home to prevent the same things from happening again. While you can't control the market, you can control the other factors that cause homes to lose equity, like your house being in poor condition or putting a small down payment on your house when you buy (a smaller down payment means there is less equity in your home if the market dips).
Reasons to Build Real Estate Equity
Perhaps the most significant reason is to build wealth. As equity increases on your property, so does your net worth and, if you sell later on, your wealth. Even if you decide to keep your property, you have the option to leverage the equity in your home to make financial decisions for your family. You could also get tax benefits, pass the property on to your kids for generational wealth, and create a new source of income if you decide to rent out the property rather than live in it.
Strategies to Build Equity in a Tight Market
- Property Selection
In any market, but especially competitive ones, it's crucial to be selective when looking at properties. Look for homes in up-and-coming neighborhoods or areas with good growth potential. Houses that need a bit of work come at a lower price point, but if you have the budget to renovate, you can increase the house's value with the right upgrades.
If you're not sure your 15 or 20-year plan involves staying in a tight real estate market, consider buying an investment property or lot in another area where the market is less competitive. Financing for non-primary residencies is typically structured differently than owner-occupied, so, as always, be sure to do your research to see if that's right for your situation. If you're thinking about an investment property, one of our local loan officers will be happy to walk you through some financing options.
- Renovate to Add Value
Renovations can boost your property's value, in some cases by quite a bit. Focus on projects that offer a high return on your investment, like the kitchen or bathroom, landscaping, and energy-efficient upgrades. Just be careful not to overdo it; you want to add value without overspending. More on that in our article Remodeling Projects That Add the Most Value to Your Home. If you're interested in taking on some projects, think about a home equity line of credit instead of funding your projects with high interest credit cards.
- Aggressively Reduce Your Debt
If you can find room in your budget to put extra money towards your mortgage, it's a great way to build equity. Just one extra mortgage payment a year towards your principal balance can save you thousands of dollars in interest alone, paying off your mortgage years faster and increasing your equity at the same time.
- Rental Income
If you have an extra bedroom, mother-in-law suite, or something similar, that rental income could be used to pay down your mortgage faster and boost your equity. Of course, this option isn't for everyone, so carefully consider all the details and implications of living with someone else before moving forward.
- Market Timing and Patience
While there isn't one perfect time to buy, and it's impossible to predict the future, don't rush into buying just any home. Do your best to stay informed about market trends and, if you can, wait for the right opportunity or a possible dip in price before committing to buying. The most important thing is to find the house that fits what you're looking for as much as possible, as there's really no one good time to buy. The right time is when it's right for you!
- Regular Property Maintenance
This one is especially important. Regular maintenance conserves property value and prevents costly repair projects in the future. Also, a well-maintained property usually appreciates more, too, which contributes to building your equity. You'll also want to think about more costly maintenance in your home, such as replacing deteriorating insulation or fixing or replacing the furnace or heat pump and other home systems.
WaFd Bank is Here to Help
If you're thinking about buying or selling your home, we're here to help. We've been specializing in helping people achieve their home ownership dreams for over 105 years. And we have options to help you buy a new home before worrying about selling your old one, like our Cross Collateral Home Loan. To find out more, visit your neighborhood branch, contact one of our friendly and knowledgeable loan officers to help you crunch some numbers, or give us a call at 800-324-9375.
All loans subject to credit approval.
