Thursday, July 29, 2021 / by Steve Ticknor
How Does Equity Work?
What Is It?First of all, it helps to know what it is. Basically, experts define equity as the difference between what you owe on your mortgage and your property's current market value. When you originally purchased your property, you included a down payment. That ranges anywhere from 3% to 20%. Let's say you paid $120,000, with 10% as your downpayment. At the time, you bought your Lake Havasu home for the fair market value of $120,000. That means that your equity at that time was $12,000.
As time went on, your mortgage balance went down as your fair market value rose. Five years later, that same property may have increased to $300,000 in value. But your mortgage balance is now around $85,000. The puts your current equity at over $200,000. In the first half of 2021 alone, the average sale price rose by 14.39% from January to June. That means that on average, a homeowner increased their equity by 14.39% in just the last six months alone by making their monthly mortgage payments. Not a bad investment for simply living in your home.
How Can I Increase It?First and foremost, continue paying your mortgage payment every month. Then, consider paying it off faster. That means either refinancing for shorter terms or making extra payments. If you utilized a 30-year fixed-rate loan, refinance it to a 15-year fixed rate. Or, if your budget allows, consider going with a 10-year loan. Your monthly payments increase from what you pay for a 30-year loan, but you pay off your mortgage much faster. Plus, you literally save tens of thousands of dollars in interest. Once you own your property, the equity is all yours. You no longer share the property with the bank.
Another way to pay it off faster is the make extra payments. One way to do so involves taking your monthly payment and cutting it in half. Then, send in the half payment every two weeks. If you pay on a monthly basis, you make 12 payments each calendar year. But, when you make a half payment every other week, you end up making 13 payments in the same time frame. That cuts down your total payments and saves you money in the long term.
The last way to increase your equity is to increase your Havasu home's value. That may mean updating/renovating outdated areas of your home. Just make sure that you do not overspend on upgrades. For example, if most of the homes on your block include swimming pools, then investing in a pool may be a good idea. But spending tens of thousands of dollars for a showstopper kitchen in an area with a more simple style of home will not bring your property's value up as much as you think. That would be a waste of money. Check out the features in recently sold homes in your area to see what they included and what they sold for. This should be your guideline for where to put your renovation dollars.
Sunstone Real Estate Group at Coldwell Banker Realty, Lake Havasu City, AZ
Originally posted on our Lake Havasu real estate blog here: http://www.sunstonerp.com/how-does-equity-work/.