Updated December 16, 2022
Building your home equity is a great way to increase you and your family's wealth without having to invest large sums of your hard earned money to do so.
Even if you don't have a ton of money to spend, there are multiple ways to increase your equity and improve your property's value.
On top of the monetary benefits, there is also a host of mental health benefits that come with improving your home, too (and not just the peace of mind you'll get from knowing you're building your family's wealth).
In this guide, we'll discuss the most common questions homeowners have when it comes to improving their home and building equity, and break down the many benefits of doing so.
Table of Contents:
- What is home equity?
- How do I build equity?
- What home improvements will increase my equity?
- What home improvements will not increase my equity?
- How can I access my home equity?
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What is home equity?
Home equity is essentially the amount of profit that you could make when selling your home (before fees, taxes, insurance, etc.).
It is determined by subtracting how much is owed on your mortgage from the total value of the property.
A person's home equity contributes to their overall wealth and can be way to fund a wide range of things, from tuition to an unforeseen emergency.
There is a strong scientific link between a person's financial wellbeing and their mental and emotional wellbeing. Simply put: Having more equity and greater wealth can directly improve your mental health, too.
Building your wealth and your family's financial security brings increased self-confidence, a decrease in stress hormones, like cortisol, and often a greater overall sense of well-being.
How do I build equity?
Because building your equity means increasing your overall wealth, improving it is always the goal, and this can be done in three ways.
These methods include making regular down payments on your mortgage, improving your home, and giving the real estate market time to appreciate.
Paying Down Your Mortgage
Every time you make a payment on your mortgage, you're increasing your equity.
Therefore, the more you pay down on your mortgage principal, the more equity you will build.
An example of a way to pay off your mortgage faster is by making biweekly mortgage payments instead of monthly.
Making Home Improvements
There are a variety of home improvement projects that can increase the overall value of your home, your equity, as well as your overall mental health.
The beauty of home improvements is the wide range of options available, ranging from borderline free to complete to as expensive as you're willing to pay.
At Hometown, we recommend starting with increasing your home's curb appeal. Not only does this have the most immediate effect on your home's value, but it's also the first thing you see when you come and go from your home everyday; shouldn't it be pleasing to look at?
Second to making improvements to your curb appeal, we recommend making minor upgrades to your kitchen and bathroom(s) for maximum equity impact.
Updating your home's interior, especially your kitchen or bathroom, is smart from a financial standpoint (i.e. maximum return on investment), but also when you consider how much time you spend on average in these two rooms, it makes sense you should enjoy them.
Cooking and hosting in a kitchen that is outdated, dingy, disorganized, or otherwise not your style can be draining to be in and downright depressing for some.
The same goes for a bathroom that isn't pleasant to spend time in, when it should be a room you can enjoy when getting ready for your day or relaxing in the evenings.
Letting the Market Appreciate
The real estate market may fluctuate, but generally, real estate tends to increase in value over time.
As home prices go up, the overall equity you have in your property goes up too.
Because of this, homeowners are often surprised when they discover they have more equity in their property than they thought.
However, because the real estate market does fluctuate quite a bit from a short-term perspective, it can be difficult to predict when home prices will drop, by how much, and when they will go back up.
This is why we advise against relying solely on this method to build equity, and instead recommend utilizing a combination of the three methods mentioned.
What home improvements will increase my equity?
As previously mentioned, small upgrades to your home's exterior, and small upgrades to your bathroom and kitchen have the biggest return on investment and the greatest ability to increase your home equity.
Generally speaking, improvements that are relatively small cost less and provide the biggest return on your investment.
We recommend focusing on the smaller things that a majority of homebuyers notice and care about the most. This typically includes: curb appeal, the kitchen, and bathrooms.
Spending $15,000 or less on any home improvement or renovation is a good rule of thumb, as spending more than that decreases the chances of getting your money back when you sell.
When deciding exactly what to improve, be sure you consider the property values of your neighborhood and what potential buyers expect from homes in the area.
Another important consideration is that making improvements to your property is only a good investment if the improvements are done properly and without opening a new line of credit.
We recommend making improvements that are up-to-date with the times while remaining timeless and tasteful as much as possible.
Here are some suggestions for the best home improvements to increase your equity...
Landscaping Improvements
The outside of your home may not be the first thing that comes to mind when you think of improving your home, but your home's curb appeal is hugely important from a value and equity standpoint.
The outside of your home is the first thing homebuyers see, meaning it has a drastic effect on your home's value.
Improving even just a few things about your home's exterior, like landscaping, can give you upwards of 106% ROI.
Landscaping is also one of the cheapest home improvement projects you can do.
Think: Pulling weeds, over-seeding your lawn, trimming back unruly bushes, shrubs, and tree branches, and adding attractive yet affordable perennials that are native to your area.
Other curb appeal projects include replacing an old deck, removing and replacing or adding a new fence, adding low-cost exterior lighting, replacing crumbling concrete (like your driveway or pathways), etc.
Small Bathroom Remodels
Bathroom remodels that cost $10,000 or less typically have a huge ROI when it comes time to sell your home.
This type of bathroom remodel typically involves updating your fixtures, replacing your old toilet, cleaning grout, and painting the walls, cabinets, and even the floors.
A small bathroom refresh can increase your home's value and your equity more than many people think.
Read more:
Small Kitchen Remodels
Just like bathroom remodels, kitchen remodels can recoup what you spend (and more in some cases) when keeping your budget modest.
This type of kitchen remodel typically involves the same type of things involved in a bathroom remodel, like updating your faucet, replacing old appliances, refacing cabinets, painting the walls, and upgrading the floors.
A small kitchen upgrade is another easy way to give your equity a major boost.
Learn more:
- Top 5 Go-To Tips for Budgeting Your Kitchen Remodel
- Stop Putting Off Your Kitchen Remodel—Get Started Today!
Light Fixture Upgrades
We all know the dreaded "boob lights" commonly found in older homes. They're affordable options and are common for a reason, but they aren't the most attractive lights, and they definitely don't offer much in terms of value.
The lighting and fixtures in a home set the tone for your entire home, so ensuring they match the style and mood of the rest of your home is important.
Replacing outdated ceiling lights and chandeliers is a pretty cheap and simple way to change the entire look and feel of your home and increase its value, as well as your equity.
On top of that, upgrading your home's lighting can have a dramatic impact on mental health too.
What home improvements will not increase my equity?
Lots of home improvements can actually decrease your home's value, so when choosing your upgrade(s), be sure you're choosing wisely.
Generally speaking, doing a large remodel is not going to increase your equity, and you are likely to lose money on the project in many cases.
Projects that cost $25,000 or more are rarely worth it, and you'll be lucky to recoup 60% of the cost when it comes time to sell.
Removing functional space from the home is another way to decrease your equity.
For example, converting your garage into a home gym may be your dream, but seriously consider whether or not homebuyers in the area will see the same value in it.
Similarly, removing a bathroom to make space for a larger living area or kitchen space is rarely the best option.
Less bathrooms typically translates to a decrease in a home's value. If a bigger living room or kitchen is a must-have for you, consider adding an addition rather than removing a valuable bathroom.
How can I access my home equity?
Your home equity is a part of your overall wealth, and it can be used in a number of ways:
- College tuition
- Retirement savings
- Emergency fund
In order to access this equity, you typically have two options, though this is dependent on your bank.
Sell Your Home
The first and most obvious way to access your home equity is by selling your home.
However, when you sell your home, you will have to pay off any liabilities on the property before getting paid.
This usually includes paying off the mortgage, paying fees to realtors, and closing costs.
Because of this, we don't typically recommend building a lot of equity in a home before selling, as the fees from buying and selling can cost tens of thousands of dollars.
Home Equity Loans
Home equity loans are the most preferred way to access home equity, especially for a primary residence.
These loans come in different forms, like a home equity line of credit and cash-out refinance loans.
These types of loans enable a person to use home equity for just about anything.
Interest rates are typically pretty low, and loan amounts can be for any amount less than the total amount of equity in your property.
Because home equity loans are backed up by a physical, tangible asset, they usually are the most affordable way for a person to access a large amount of funds.
