Real estate has long been considered a golden investment. Whether they’re homes in Springfield, MO, or anywhere else in the country, owning property offers the potential for steady growth, is a tangible asset, and provides a sense of security, even in turbulent times.
However, many people fall into the trap of seeing real estate solely through the lens of the final sale – the big payday when they eventually offload the property. But there’s a treasure trove of benefits waiting to be tapped well before that final sale with a buyer for your property.
The truth is, that real estate offers a wealth of advantages through ownership, and one of the most powerful leverages you have as a homeowner is the equity that comes with your property.
Table of Contents:
What is Home Equity?
Equity in real estate refers to the portion of a property’s value that you own. It’s essentially the difference between the home’s current estimated market price and the total amount you still owe on your mortgage. For example, if your home is worth $300,000 and your outstanding mortgage balance is $200,000, you have $100,000 in home equity.
Your home equity will change over time as you make your mortgage payments and as your property’s value appreciates. But if the price dips, then so will your home equity. Say your $300,000 home drops to $280,000, and you owe $200,000, you’ll be left with $80,000 in equity, or $300,000 minus $280,000. This being said, real estate is one of the soundest investments you can make and property has for decades risen in value at much higher rates than inflation.
It’s easy to know your home equity if you can keep track of your property’s current estimated value. The best way to determine it is by getting your home professionally appraised. To save money, you can also get a quick estimate by checking comparable listed homes in Springfield, MO.
How to Build Home Equity
The market value of your home can fluctuate, something which is generally out of your control. But there are ways to build your home equity regardless of the market’s whims. Here are a few simple yet effective strategies savvy investors use:
Make a Large Down Payment
This is the easiest and fastest way to build home equity. The larger your down payment when you buy your property, the greater your starting equity. A bigger down payment also translates to a smaller loan amount. This means more of your monthly payments can go toward the principal.
This might tempt you to put in an overly large amount as a downpayment. However, the largest amount you can possibly put down is not always the best option. Before investing in real estate, it’s best to assess your finances and set a realistic budget first. After all, you don’t want to overly strain yourself by putting all your savings towards a down payment, leaving no wiggle room for unexpected expenses or potential maintenance costs.
You’ll want to enjoy living in a new home and having paid an overly large amount may mean you’re under unnecessary stress for a prolonged period of time.
Pay Off Your Mortgage Faster
Each mortgage payment is divided into two parts: principal and interest. The principal is the actual amount of money you borrowed, and the interest is the fee you pay the lender for borrowing the money.
During the first few years, a larger chunk of your payment goes towards interest. As you continue making payments, the proportion gradually shifts towards the principal, significantly reducing your loan balance and increasing your home equity.
If you want to expedite this part of the process, consider making bi-weekly payments instead of monthly ones. This will effectively increase the number of payments you make in a year, chipping away at the principal faster. You can also explore making additional lump sum payments towards the principal whenever possible.
Make Strategic Renovations
With the right renovations, you can help increase your property’s value, and in effect, your home equity as well. Invest in upgrades that enhance your home’s functionality as much as its aesthetics. Focus on these aspects of the property for the best results:
Boost Curb Appeal – First impressions matter, so improve your home’s exterior with landscaping, a fresh coat of paint, or a new front door. These are relatively inexpensive upgrades, but they can significantly enhance your home’s looks.
Upgrade Essential Spaces – Kitchens and bathrooms greatly affect a property’s value. Upgrading these spaces with modern fixtures, countertops, or flooring can yield a strong return on investment. Note that one of the best upgrades you can install is changing your front door, or even just giving it a fresh lick of paint.
Expand the Living Space: Adding a four season sunroom or finishing a basement won’t only increase your home’s functionality, but also significantly add square footage. Before venturing into a large and costly project ask your real estate professional, who’ll be able to tell you if the improvement you’re planning will be a positive or worthwhile return on investment.
What are the Different Ways to Tap Home Equity?
Once you’ve built up a substantial amount of home equity, you’ll have the choice to leverage it for great financial opportunities. Homeowners do this by borrowing against their home equity. This means using your stake in your property as collateral for a loan.
There are several ways to access your home equity, including:
Home Equity Loan
This is a one-time cash injection that lets you borrow a lump sum of money based on your current home equity. They typically have fixed interest rates and set repayment terms, making them an easily manageable option for accessing funds.
A home equity loan is a secondary loan, separate from the original mortgage. However, this time the interest you pay for can be tax-deductible if you use the funds for home improvements.
Cash-Out Refinance
Unlike a home equity loan where you set up a new loan, this option acts like a complete reset on your mortgage. You replace your existing mortgage with a new, larger loan. The difference between the new loan amount and your current balance is the cash you’ll get. It can be a good way to access a larger sum of money and potentially secure a lower interest rate, but it also means extending your loan term.
HELOC
HELOC or Home Equity Line of Credit is one of the more popular options homeowners use. It works similarly to a credit card, with your home equity as collateral. You can borrow as much or as little as you need, up to the credit limit, and only pay interest on the amount you use. This flexibility makes them a good option if you’re not sure how much money you’ll need.
Lenders will typically let you borrow up to 85% of your home equity for 10 years. Payments work the same way as any other loan, but HELOC interest rates are variable, so they can go up and down throughout the loan’s duration.
Should You Use Your Home Equity
Home equity is a powerful tool for homeowners, but to be clear, it’s not free money. You’ll still be responsible for repayments with interest, so only use it for important investments. Let’s look more deeply at the advantages and considerations.
Pros
- Access to Capital
Home equity provides homeowners with access to a significant source of funds that can otherwise be out of reach. You can use the money for several types of investments like home improvements, debt consolidation, education expenses, or retirement planning. This access to liquidity can help address immediate financial needs or pursue long-term goals.
- Lower Interest Rates
Another major advantage is you can secure loans with lower interest rates compared to other loan options. HELOCs (Home Equity Line of Credit) typically offer significantly lower rates than personal loans or credit cards. This translates to significant savings over the loan term, making it an attractive option for financing various needs.
- Tax Advantages
In some cases, the interest paid on home equity loans used for home improvements can be tax-deductible. However because there are limitations to what you can deduct and tax laws can change, always consult a tax advisor to understand the current implications.
Considerations
- Your Home is the Leverage
The biggest consideration of using home equity is that it’s secured by your home. If you default on the loan payments, the lender can foreclose on your property, forcing you to sell it to repay the debt. This risk is especially significant if property values decline.
Moreover, using home equity for anything other than home improvements can erode your equity over time. Every dollar you borrow against your home reduces the amount of equity you have. This can be problematic if you eventually need to sell your home, as you’ll have less profit after paying off the loan.
- Increased Debt
Any loan adds to your overall debt. Using home equity extends the period it takes to own your home free and clear. This can be particularly unwanted if you’re nearing retirement and want to be debt-free.
- Fluctuating Interest Rates
Some forms of borrowing against home equity like HELOCs often come with variable interest rates and fees that can fluctuate over time. While initially offering lower rates than other types of loans, these variable rates can increase, resulting in higher monthly payments and overall borrowing costs. This can make it harder to plan your finances in the long run.
- Temptation of Overspending
The easy access to large sums of money from a home equity loan can be tempting, leading to impulsive spending. It’s crucial to have a clear plan for how you’ll use the funds and stick to a budget to avoid accumulating unnecessary debt.
What is It Used For?
There aren’t any limitations on how you can use your home equity, but some uses are financially smarter than others. Here are a few ways most homeowners put their home equity to work.
Renovations
A great way to use it is by investing in improvements that boost your home’s value. Upgrading kitchens, and bathrooms, or adding energy-efficient features can make your home more attractive to buyers while also giving you a more enjoyable space to live in. This increased value translates to a higher return on investment if or when you eventually sell.
Tuition Funds
College tuition can be a major burden for students and families alike. A home equity loan or HELOC can help bridge the gap, letting you or your loved ones pursue educational opportunities without drowning in student loan debt.
Emergency Funds
Life throws curveballs sometimes. During economic slumps, an unexpected medical bill or a major car repair can easily derail your finances. However, having your home equity as a safety net can provide peace of mind and prevent you from going into high-interest debt during emergencies. Think of it as a financial cushion that allows you to weather unexpected storms without jeopardizing your long-term financial goals.
Retirement Planning
Leveraging your home equity as part of your retirement planning strategy can provide additional financial security during your golden years. Many people eventually downsize to a smaller home. They can use their equity to supplement retirement income, cover healthcare expenses, or fund travel and leisure activities in retirement.
Investment Opportunities
Home equity can provide seed money to launch or expand your business. You can also use the money as a springboard for other real estate ventures. This can mean buying rental properties to generate passive income or even going into development projects. Just remember, this carries inherent risk, so make sure you have a solid business plan in place before you make your move.
Unlock the Equity in Your Property
Consulting the right real estate agent is crucial if you want to make the most out of your home equity. When you have a Springfield, MO real estate expert who can provide guidance, you can achieve your goals.
Laura Duckworth and her powerhouse team at Flat Fee Redefined offer years of industry success in Springfield and the rest of Southwest Missouri. Whether you need real estate advice or you’re looking for homes in Springfield, MO, we provide individualized solutions that can help you succeed in your real estate journey.
Work with the top real estate professionals in southwest Missouri. Set an appointment with the Flat Fee Redefined team today by calling 417.520.6545 or sending a message here.