Equity is defined as “the value of a mortgaged property after deduction of charges against it”. In other words, when you’re talking about a property, the equity is the amount of money you would get if you sold the property today.
When you first purchase a property you will put a deposit down. It’s likely to be 20% which is $40,000 for a $200,000 house. At this point in time, if you sold the house, you would need to repay the mortgage company $160,00 and you would have to pay legal fees and real estate agent commission. If you were lucky you would walk away with $30,000!
Fortunately, most people don’t sell the moment they buy. The longer you stay in the property and pay the mortgage, the less you will owe the mortgage company. That means, the more of the property you will own and the greater your level of equity.
Ultimately, when you have finished paying the mortgage, the property belongs to you and the value of your home is your equity.
High levels of equity are good if you want to retire or even release additional funds.
But, paying your mortgage is only one way to increase your equity over time:
Invest In Multiple Properties
It is relatively easy to secure additional funds and purchase a property to let or even to flip. Providing you can afford the mortgage if things go wrong, this can be a great way to make some extra money and increase your equity. The best thing about this approach is the renter is paying your mortgage. They are effectively buying the property for you and increasing your equity with every payment.
If you’re going to try this route it’s recommended you sign up for a real estate course. It will give you a better understanding of the property market and can even be a useful backup career.
Property Value Increases
Another way in which your equity can grow is when the property market enjoys a surge. A surplus of buyers and few properties available means that sellers can afford to sell their properties for more. This has a knock-on effect on the industry, forcing the price of all properties upward. In short, your property will be worth more than you paid for it. Anything over the price you paid is additional equity and it’s all yours.
Pay It Down Faster
This doesn’t increase the total equity of your home but it will allow you to pay off your mortgage faster and access a greater level of equity. It can help if you want to retire early or if your want to access some of your funds for a project or to help your children out.
To pay it down faster you can increase your monthly mortgage payment or save your funds and make a lump sum payment off your mortgage each year. But, you will need to verify this is possible with your current mortgage contract.
Generate Additional Funds
In order to pay your mortgage down faster, you may want to take a second job. This can allow you to increase the mortgage payments. But, the additional funds can also be channelled into a savings account that has an interest rate higher than your mortgage interest rate. In this instance, you’ll make more money saving than you will gain in equity by overpaying your mortgage.
The beauty of this approach is the ability to withdraw your savings at the right time and use them to pay off your mortgage entirely. That gives financial freedom.
Don’t forget, the greater your equity the easier it will be for you to move house and get the property of your dreams. Think about improving your equity today.