Question:
I just bought a house and plan to live in it for at least 5 years. What can I do to increase my equity besides making extra principal payments on my loan?



Answer:
Congratulations. You’ve bought a home in one of the best markets for buyers. Just the fact that you bought your house in a down market will give you a good chance of your house increasing in value while you live there. This, in turn, increases the amount of equity you have in your house.

“Equity” is the percentage, or amount, of your house that you own outright. So if you put 10% down on the house when you purchased it, you started out with 10% equity.

There are a number of ways of increasing your equity while you own your home.
First, every time you make a mortgage payment, you increase how much you own by a small amount. If you make additional payments, or pay extra, towards your principal you further add to the equity you have in your home.

Another way to grow your equity is to improve the value of the house, which increases the difference between the loan amount and the total value of the home.

There are a few ways for a house to increase in value. One of them is through market changes. You bought in a down market, which is great. Prices are low and you took advantage of the first part of the “buy low, sell high” concept. If you keep your house until you are in a seller’s market, then you will get to finish the cycle by selling high. This is the more passive approach to increasing value.

The other approach is to make updates to your house which can increase the value. What you decide to do will depend on what needs to be done, how much those changes will cost and how much of a benefit there will be. Some things that tend to pay the owner back the best when they go to sell are renovating kitchens and bathrooms. Remember, replacing things like the furnace or cooler are not updates, but maintenance items. They do not necessarily increase the value, but they certainly will make the house more saleable when you do go on the market.

The most important thing is to do the renovations you will enjoy the most and that will have the biggest increase in value. Some less expensive ways to increase the value of a house are cosmetic changes such as refinishing wood floors or replacing vinyl floors with tile.

Items like new windows definitely increase the value and also save you money on your heating and cooling bills. In this case, it’s an update that pays you back two fold. Once through the energy cost savings and again when you go to sell the house.

In short, enjoy your house. Make extra principal payments when you can. Make renovations your will enjoy and see where the market takes you. You can live happily in your home knowing you bought at the best time to buy and you’ll try to reap the benefits of that decision down the line.

Views: 82

Comment by brian botkiller on December 19, 2008 at 3:57pm
Nice post. As a new homeowner, I'm still learning, but I know that it was a good idea to buy earlier this year. Renting is straight up thievery that I don't care to ever be part of again.

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