Three Ways To Build Equity

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There are three different ways that a homeowner can build equity: 1) paying down mortgage principal, 2) making home improvements, and 3) through home appreciation.Building Equity by Paying Principal on Your MortgageWhen you think of building equity, many people think that the only way to do so is to pay principal on their mortgage. There are two basic elements that make up your mortgage payment: principal and interest. Interest is the fee a lender charges for permitting the borrower to use their money for a specific length of time. Principal is the amount borrowed from the lender, excluding interest.And while you do build equity by paying down your principal, there are additional ways to build equity.Building Equity by Making Home ImprovementsA second way to build equity is to make home improvements. This can be anything from making repairs (re-shingling the roof, repairing or replacing a faulty water heater, etc.) to upgrading your home (kitchen renovations, room additions, etc.).By improving the condition of your home, you increase the value of the home, thereby increasing your equity. Let's say you have a home that's currently worth $100,000. You still owe $50,000 on that mortgage; therefore you have 50 percent equity. Now, let's say you add on a new room that brings the value of the home to $125,000. You've just increased your home's equity by 50 percent.Keep in mind that the increase in home value depends upon the type of improvement you make to your home. You shouldn't get too fancy as this can have a negative effect on the resale value. Plus, once you make the improvement, it takes a little while for the value to appreciate.Building Equity by Home AppreciationA third way of building equity which some people might overlook is by home appreciation, or the increase in market value of real estate. When the rate of home appreciation goes up, the value of homes goes up. If your home is worth $100,000 and the rate of appreciation rose five percent, your home is now worth five percent more and you've just increased your equity.In recent years, interest-only loans have become quite popular. However, there is still concern among homeowners that by paying only the interest on an interest-only mortgage, you're not building equity. This is not necessarily so since you can also build equity through home appreciation.Homeowners are becoming more educated about their mortgage options. While an interest-only home loan is not for everyone, it is good for those who know how to manage their money and may be less interested in building equity and more interested in funneling their finances elsewhere. Homeowners in an interest-only mortgage don't have to pay only the interest. An interest-only mortgage just gives them the option to pay only the interest or as much principal as they like on top of the interest.As a homeowner, it's good to remember that there are alternative ways to build equity besides just paying down your mortgage principal. But even if you feel the best way to do this is by paying down principal, it can't hurt to talk to a mortgage banker. They can give you more information and help you figure out if your current mortgage is really the right one for your current situation.  Mortgage News Home Current Headlines Next Article  Refinancing | Home Loans | Home Equity Loans | My Quicken Loans Login Mortgage News | Mortgage Rates | Mortgage Calculators | Apply Online About Us | Careers | Contact Us | Feedback | Site Map | Help | Search Security and Privacy | Disclosures and Licenses | Terms of Use © 2000 - 2006 Quicken Loans Inc., All rights reserved. Lending services provided by Quicken Loans Inc., a subsidiary of Rock Holdings Inc. “Quicken Loans” is a registered service mark of Intuit Inc., used under license. Build 3178 2006-01-13 12:29:22

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